If you are a freelancer, chances are you don’t have a steady income. That means every penny counts. I started collecting my coins in a large jar and at the end of the month deposit it into my account. Hey, you gotta do what you can, right?
But I digress…
There are going to be times when you don’t know when you are going to get your money. Therefore, a traditional budget will not work.
How To Budget Your Cash Flow As A Freelancer
Irregular income is one of the disadvantages of being a freelancer. It makes it hard to stick to a budget. Been there, done that.
Not too long ago I shared some tips to help freelancers save money. This is kind of a follow-up to that. Here are some ways you can develop a spending plan to help budget your cash flow despite not having a source of steady income.
Monitor Your Cash Flow
It is easy for regular employees to know their monthly income. However, freelancers can only guess how much they will earn each month. To make estimating your monthly income easier, monitor your cash flow.
You should record your expenses and put some amount in a savings account. That way you don’t need to live from one paycheck to the next. Make sure that you record all your business and personal expenses. Monitoring the amount, you spend is as important as tracking your earnings.
Know how much you spend each month on utilities, internet services, transportation, phone, food, etc. That way you can find out if you are earning enough to allow you to sustain your lifestyle. Once you understand your total expenses, the next step is to determine how much additional income you need to cover any extras that might arise.
The best way to find out your food expenses is to monitor them for a couple of weeks. You should not include the costs of dining out unless you often go out with clients.
Housing expenses include insurance and property taxes, as well as monthly mortgage payments or rent. Utility bills are irregular, just like your income. You should look at them and find out when they are the highest for the year. That way, you can set aside more cash to pay for utilities during those months.
Phone and internet services are necessary for freelancers. Make sure you get the best rates from your provider. Transportation costs include gas, insurance, registration, and car payments. You will save a lot of money because you work from home, however, so this is a plus.
Medical expenses include your prescription and over-the-counter medications. You should include your outstanding medical bills in your monthly budget as well.
And if you have gotten outstanding loans like just right loans to help pay bills, your budget should include payments for them as well. Look for ways that will help you pay off your loans faster to get rid of that financial burden as soon as possible.
Make It Your Goal to Live on Half Your Income
You should try your best to live on 50 percent of your earnings. Divide the other half into flexible expenses and savings, with a ratio of 30 percent to 20 percent. If you are able to stay within that proportion, you will not have a hard time achieving long-term financial goals, such as saving for retirement or a college fund for your kids.
If you manage to live within the 50/30/20 ratio, then you can easily start an emergency fund, which everyone needs. You can put in what you can afford. While this means you give up some luxury items, you will thank yourself the next time something breaks down unexpectedly and costs money to repair.
You should also save for taxes. You can open another savings account in which you can put in your tax money, which will ensure that you will have enough money when tax season rolls around.
Keep Separate Accounts for Personal and Business
I made the mistake of depositing paid invoices into my personal account. Between clients and running a household the last thing I had time for was to stop and make a separate deposit ticket.
That was my mindset early on.
But you should keep your business account and personal credit card accounts separate. That way, you can easily track all the income and expenses connected to your freelancing job, making it easier to balance your books.
Know Your Clients
Another thing to consider is to know when your clients pay you. Doing so will ensure that you don’t need to worry about being unable to pay bills because a client hasn’t paid you yet. While you can’t control your clients, you can determine how they behave through their actions in the past.
You should make a conscious effort to know when you invoice your clients, and when they pay their bills. Track the times they missed payments as well.
And as much as I hate to say it, I would advise you to drop clients who are always late in paying. If that’s your only client, I totally get it.
But you should consider the possibility of being out of work someday. While it might seem good to have regular work from a single client, still, any freelance job is unstable. That’s why you need to diversify. By diversifying your cash flow, losing one client will not affect your monthly income.
Because when companies need to downsize, the first to go are the freelancers. There is no job security, notice period, or compensation in freelancing.
Save for Your Retirement
As a freelancer, you are not part of a company’s 401 (k) plan. That means you need to save for your own retirement.
You should consider putting aside at least 10 percent of every paycheck for your retirement fund. And as your cash flow increases so should the percentage toward your savings.
Get an Accountant
To make it easier to balance your books and your spreadsheets, hire a Certified Public Accountant (CPA) if you can. He or she will also be a big help during tax season. The accountant will make sure your finances are in order and that you are filing your taxes properly.
You should talk with your accountant even if it is not time to pay the taxes, though. A CPA can help you develop a retirement plan, as well as strategies to fulfill your other financial goals.
Know Your Worth
Freelancers should know their worth. It is a tough profession, and you should know when to ask for a raise. Clients are more likely to increase your rates as long as you’re a valuable member of their team.
Budgeting might be hard for you at first, but it is an important factor that can help you maintain your financial success. By creating a budget, you can easily manage your cash flow and enjoy the rewards of a freelaner lifestyle.
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