Now that we’ve covered some of the basics, I’d like to start focusing these posts on personal finance hurdles specific to freelancers. Don’t worry, if you work a “regular job” you’ll still get a lot out of this site, but my goal here is to help those who own their own business or freelance online.
One of the biggest initial adjustments to make when you’re freelancing is learning to live and budget on an income that varies every month. Unlike the working stiffs, we usually can’t write down at the beginning of the month exactly how much we’ll be bringing home that month. After you freelance long enough, you should be able to make a pretty good guestimation, or use a six to twelve month average, but those numbers still won’t be as precise as a steady paycheck would.
One of the goals I set and achieved before leaving my full time job was to build up a one-month cushion in my checking account. Now, I basically pay this month’s bills with last month’s income. That way I can plan my monthly budget with an accurate income, because I already know what that amount is, I earned it last month.
If you’re able to work a bit of overtime, or drastically reduce your spending before leaving your day job, I am a huge fan of the one-month cushion. This cushion is in addition to my emergency fund. The emergency fund is in a separate account and should not be left in your checking account, that makes it way too easy to spend.
If you are living month to month, or paycheck to paycheck, setting small earnings goals may be a good way to go as well. When I first started freelancing I set daily goals. I would tell myself I have to earn $75 per day to cover my bills. So if the first day I earned $100 on a small project, then I only had to earn $50 the following day. Or, if I earned $100 the first day, I had an extra $25 to save or spend at the end of the month.
After the first six months, I was able to better estimate and plan my income for each month, and I stopped with the daily or weekly goals, they just weren’t needed any longer. But when you first start out, they’re a great way to keep yourself motivated and on track so there are no surprises at the end of the month.
Freelancers also have some pretty unique expenses, from office equipment and software that we can write off, to self-employment tax and our own health insurance. I’ll run down some freelancing expenses in tomorrow’s post. If you’re currently budgeting on a variable income, let me know in the comments if you have any additional tips.
