The benefits of freelancing are obvious: you can set your own schedule, work remotely, and find projects that interest you. But for all these benefits, freelancing comes with a drawback. Namely, freelancers are often subject to inconsistent incomes. With money coming in at different times from various clients, new and experienced freelancers alike can struggle to make sense of their finances. Fortunately, these 5 budgeting tips for freelancers can help get your income and expenses in order and help set you up for long-term financial stability:
1. Calculate your monthly expenses
The first step to budgeting as a freelancer is to establish what your monthly expenses are.
While salaried workers can base their budget on their regular incomes, freelancers have to start with their expenses. Why? Simply because monthly expenses like rent, utilities, bills, and groceries can be more consistent than a freelancer’s monthly earnings.
Knowing how much money you need each month to cover these necessities will allow you to have a better idea of how much extra you have each month to spend and save.
2. Open a dedicated bank account for taxes
Taxes are an entirely different game if you’re a freelancer, which is why this is one of the most important tip from all of our budgeting tips for freelancers. While employed workers have a portion of each paycheck withheld for taxes, freelancers are fully responsible for calculating and paying the taxes they owe. This means systematically putting a portion of each paycheck away until tax season rolls around. To keep track of how much you’ve earmarked for the government, we highly recommend opening up a savings account purely dedicated to taxes. Not only will this keep your tax savings separate from your regular savings, it also helps you to distinguish mentally between money that is yours and money that is owed.
Ultimately, putting money aside into a separate tax account will prepare you financially—whether you pay quarterly or annually—and alleviate the stress that tax season can cause freelancers.
3. Track your business expenses
As a self-employed freelancer, you may be eligible to claim certain expenses on your tax return. Money you spent throughout the year for work-related expenses, like transport, equipment, services, or extra materials can be deducted from your tax bill. If you work from home, even things like internet, mobile, and electricity costs can be partially deducted. In order to lower your tax bill, however, it is imperative that you keep records and receipts of all your expenses. An easy way to do this is to have a separate bank account for your business where you charge all work-related expenses. If your personal and professional finances are still combined, create a spreadsheet and update it regularly with your expenses. It’s also a good idea to store all receipts for business expenses—whether it’s a bill from a business lunch or office supplies.
4. Create an emergency fund
A key component to building a stable financial foundation—for freelancers and employees both—is to put money into an emergency fund. An emergency fund is exactly what it sounds like: a stash of money that is intended for a time of need, such as an urgent home or car repair.
For freelancers, an emergency fund also functions as potential income replacement. If you lose income for whatever reason—whether you are sick and can’t work for an extended period or are in between clients—having an emergency fund can help weather the storm. It can take time to build your emergency fund, but start by putting a little bit away each pay cycle. You can even factor it into your base expenses. Ideally, an emergency fund should have enough money in it to cover your expenses for about six months.
5. Don’t forget about retirement
Between covering monthly expenses, putting away a significant portion of your income for taxes, and saving for emergencies, it’s all too easy to forget about long-term financial planning. But as freelancers we don’t have workplace benefits like pension plans: we have to save for retirement ourselves. Fortunately, there are some good options at our disposal. In Canada, for instance, Registered Retirement Savings Plans (RRSPs) can be used to both save for retirement (with investment potential) and as a tax strategy. That is, you don’t have to pay taxes on any contributions to an RRSP until the money is withdrawn. If possible, put away a small portion of each paycheck for retirement, but be sure to prioritize tax savings and emergency funds.
In summary, the best budgeting tips for freelancers come down to your strategy of organizing your expenses, differentiating between personal and business spending, staying on top of taxes, and saving for emergencies and retirement. By taking all 5 elements into consideration and planning accordingly, you can establish a more robust structure for what can sometimes be inconsistent freelance income. For more freelance tips and support, consult our SkillPack blog.
