How to Budget as a Freelancer

So, you’re a freelancer who’s leaving their house in the morning, explaining to your roommates that you need to get work done and learning when to actually stop working. Now, it’s time to get your freelance finances in order.
Order in lunch, fire up Slack, and plan your afternoon shower. It’s Work from Home Week! From our couches and our local coffee shops, Kwarapreneur is bringing you advice on maintaining your productivity, balance, and sanity, whether you’re working at home for just a day or a whole career.
The basics of budgeting work as a solid foundation regardless of whether you’re a full-time employee or a freelancer: You want to know where your money is going, cut down on expenses where possible, live below your means, save at least 10 percent of your income and invest early.
But there are plenty of circumstances that you’ll face as a freelancer that are unique to your position. Here’s what to keep in mind.

1. Know Your Clients:
Familiarize yourself with when your clients tend to pay up, so you’re not left with overdue bills because someone didn’t come through as quickly as you thought they would.
Keep a document or notebook of when they pay and how often they’re late or miss payments. Consider dropping them if it happens consistently. For different methods for charging clients.

2. Keep Your Personal and Business Accounts Separate:
The most important thing you can do as a freelancer is to keep your personal and business spending separate. This includes opening up a separate business bank account (preferably a high yield account), as well as a business credit card. Consider also tracking your expenses in a different money app than you track your personal expenses.
Separating your business accounts from your personal accounts makes it easier to clearly track all income and expenses related to your business without any added guesswork. Using a business bank account and credit card can cut down on the hassle of trying to parse out which expense goes with what when you’re balancing your books.
And keep a separate list or spreadsheet of all of your financial accounts, including the name and login URL so you don’t lose track.

3. Give Yourself a Salary:
Once you have your business and personal accounts set up, it will be easier to give yourself a salary, while keeping the rest investing in your business (or in a “backbone account,” which we’ll get to next). You could base your salary on:
• A percentage of your profits: This will work best for new freelancers and people building up their business.
• A set salary: Once you’re established and have a decent flow of income, you can set a specific salary number for yourself.
Especially at first, you’ll want to leave as much as possible in your business accounts (particularly if you’ve never done taxes as a freelancer, which can get tricky and may wind up with you owing a good chunk of money), and take solely what you need to live, save a little and invest. As you earn more, you can increase your pay.
Once you have your salary, it needs to cover your fixed expenses: housing, food, insurance (including prescription costs), utilities, internet/phone and transportation. Set aside another amount (around 20 percent) for taxes.

4. Create a “Backbone” Account:
This is obviously tip for just about anyone, but for freelancers it’s doubly important to build a cash cushion that you can use when things slow down. You don’t know when/if clients will pay on time, if you’ll lose them, or if they’ll decrease the amount of work they need done. You’ll also want a cushion for your quarterly taxes, or for any other unexpected emergencies that pop up.
An emergency fund. Whatever you call it, it’s all about having options—in case you lose work, yes, but also so you don’t have to take on work you find stressful or unfulfilling.
As noted above, you’ll want to keep your “backbone” fund separate from your personal accounts, sort of like a bucket approach to saving. That way you’ll be less tempted to spend the money on a whim.
This may seem overwhelming—it’s a lot of money to put aside. But as other freelancers have written, you need a bigger cash cushion when you’re going it alone, especially the first year when you’re figuring things out.
And, just as importantly, track your cash flow. Start a spreadsheet or Google doc or use an app to track invoices, billable hours, who’s paid what and when, where all of your money is going, etc. Remember: You’ll never be sorry that you tracked too many things, but you will be sorry if you don’t know what’s happening with your money.

5. Automate Your Financial Plan:
Unless you’re a freelance accountant, you likely don’t want to spend a lot of your time dealing with your finances. That’s why automating is so helpful.
Consider automating the following:
• X percent of your personal income into your savings account
• X percent of your personal income into your Backbone fund
• X percent of your business income into a tax estimate account
• Bill payments, including rent, loans, insurance, internet/cable, cell phone, etc.
• Expenses, income, invoices, etc. Reminders to check your budgeting apps throughout the month
Additionally, as suggested here, have your bank automatically send you updates on your account balances daily (or whatever works best for you) so you know where you stand and you’re not hit by a surprise overdraft fee.

6. Raise Your Rates:
Freelancing is tough, but it also puts you in the position to raise your rates if and when you see fit. Not that it’s a decision you should take lightly—you need to be intentional about your worth and which clients you should charge more.
Most importantly, know what your worth, and don’t undersell yourself. And go get your money.

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