As a freelancer, budgeting is a task that comes with numerous challenges. Not only do self-employed persons deal with added business expenses, like office space, equipment, and sometimes employee salaries, but they must also contend with fluctuating income levels and commissions. It’s tough to plan next month’s spending if you don’t know how much revenue to expect.
Additionally, a freelancer’s budget may differ based on his or her specific industry. A freelance designer who works mainly out of her house is likely to have a different set of expenses from a mechanic who operates his own auto shop. As a self-employed person, you need to create a budget that accounts for the ups and downs of the freelance lifestyle while helping you plan for the future.
Here are six steps every freelancer should take to streamline her budgeting endeavors and avoid ending a month in the red.
1. Track Your Spending
It’s impossible to budget for the future if you don’t know where your money is going today. Start by making a list of all your recurring business and personal costs, such as rent, utilities, outstanding payments and taxes. Next, catalog important expenses like groceries, car maintenance and medical bills, the totals of which can vary from month to month.
2. Strive to Use Cash
Overspending is easy when you reach for the charge card every time you make a purchase, especially when the only time you’re reminded of how much you spend is the end of the month.
A good way to keep spending in check is to use cash for variable expenses like groceries and dinners out. Start by taking out a predetermined amount of cash at the beginning of the week. If you run out of money before week’s end, it could be an indicator that you’re spending more than your budget truly allows. The goal is to adjust your variable expense spending until you’re again living within your means.
3. Create an Emergency Fund
Freelancers know that their incomes can vary dramatically from one month to the next. Jobs can fall through, or clients might fail to pay the bill on time. Because your expenses will likely remain constant regardless of income, keep a special fund for emergencies.
Putting aside cash for emergencies can prevent unpaid bills from stacking up or going into debt when revenue plummets. For best results, set money aside during the good times and strive to stay one month ahead of expenses throughout the year.
4. Diversify Your Client Base
While not explicitly related to money management, diversifying your client base is a good way to ensure your income levels remain relatively constant. Even if your current clients are delivering plenty of work, you can’t assume they will continue to do so indefinitely. One way to mitigate a surprise drop in revenue is by taking on a broad range of clients with different needs. Start marketing yourself to prospective customers through different channels and stick with the ones that work best.
5. Consider a Business Account
Technically, there’s nothing stopping freelancers from keeping their business and personal funds in a single account. But choosing to open a separate business account offers numerous benefits for budgeting. As a freelancer, you are likely responsible for a number of business expenses, including office space, equipment, supplier fees, and employee salaries.
Not only does separating your business expenses enable you to keep better track of spending, but it also helps you out considerably come tax time. Because all your business revenue and expenses will be in one place, it’s simple to identify possible deductions. And in the event of an audit, you can easily show the IRS that your expenses are valid.
If you insist on keeping only one central account, QuickBooks Self-Employed can also be used to help you divide your personal and business expenses, as well as easily find deductions and prepare quarterly taxes.
6. Plan for the Future
As a freelancer, you need to create a budget that reflects your current income level. In addition, you may also want to design a second, aspirational budget as impetus to increase your earning power. Not only can this second budget inspire you to pursue higher-value clients and take on new jobs, but it may also encourage you to cut costs. The dream of achieving financial health may be enough to help you cut back on unnecessary restaurant visits or luxury purchases.
Another way to plan for the future is to create financial projections for your business. Good projections can help you determine when the time is right to expand your business. If your current income levels are fast approaching those of your projections, it may be a good time to raise prices, take on more employees or say “yes” to purchasing that office.
Many freelancers struggle with variable income levels along with expenses not faced by other types of businesses. By creating and sticking to a budget, you can ensure that there is enough cash available for day-to-day responsibilities as well as any emergencies that crop up.
For more ways to handle your money, read our next article on accounting basics for self-employed people.