Thinking About Freelancing? How to Prep Your Budget
Breaking away from the 9-to-5 to go out on your own can be immensely rewarding. But it can also be terrifying—especially when you start to think about your finances.
Don’t let the seduction of a steady paycheck at your office job keep you from pursuing your own goals, though. By establishing a solid financial plan before you quit your day job, you can feel confident going at it alone. Here’s how to get started.
Calculate Your Bare Minimum
We’ve all heard the amazing success stories of those freelancers who’ve doubled their previous income. Chances are, though, they didn’t achieve that feat in their first month out.
If you’re not doing so already, I recommend tracking all of your spending for a couple months so you have an idea of what your normal cash flow looks like (there are all sorts of online tools to help—my favorites are Mint and LearnVest’s Money Center).
After two or three months, review your spending history with the goal of determining what, exactly, you need to bring in each month to live on. What’s the minimum amount of profit you need make to cover your bills and have a decent standard of living? While you may consider little luxuries essential (and hey, budgeting is all about allocating your money in the way that makes sense for you), this amount should at least cover your necessities like rent, insurance, and food.
Then, before cutting ties with your current employer, try living on that amount for a month or two, socking the rest of your salary away in savings. If you’re doing okay (or if the promise of a future payoff can keep you on track), that’s a great sign. This exercise will also help pad your savings a bit in case those first few months on your own are particularly lean.
Of course, you’ll also want to make sure that your bare minimum is realistic for someone in your field and of your skill set to make. Run your numbers through the FreelanceSwitch hourly rate calculator to help you determine how much you need to charge in order to meet your business and personal financial obligations, then do some research to see if that rate is realistic to charge.
Make a Plan and Stick to It
When you’re on your own, your income isn’t coming in regular paychecks. All of your clients might pay you one week—and you might go another six weeks before you get another check. So how do you prepare?
Having figured out the bare minimum you need to live on will help you here, but what’s more important is sticking to that number—even on those months when you bring in more business. Read: When your two biggest clients pay you on the same day, don’t celebrate your good fortune with an expensive night out and a shopping spree. You’ll be giving yourself future peace of mind when you save what you don’t need for your next lull—or for when you need a new laptop ASAP to meet your deadline.
I also recommend having a back-up plan in case you don’t have work coming in for a period of time. Keep in mind that there are only two ways to increase your profit: Cut costs or work more (or for more money). Which makes more sense for you— can you further cut your expenses to make it work? Can you take on a side gig?
Don’t Forget Taxes & Retirement
One thing you definitely need to keep in mind as you set up your budget? Taxes. As a freelancer, you should pay quarterly estimated taxes. Don’t wait to pay them all in April, or you’ll face fines from the IRS. Work with an accountant familiar with the tax code for the self-employed to determine how much you should be setting aside out of every payment you receive, and set up a separate savings account where you can stash the money that needs to go to Uncle Sam.
Also remember that it’s up to you to handle retirement contributions that your employer may have arranged in the past. As you plan the future of your business, make sure that you also continue to save for retirement. If you have an employer-funded account like a 401(k), now’s the time to roll it over into an individual account like an IRA or mutual fund. A trusted financial advisor can help you review your options.
Setting yourself up for financial success isn’t the most fun part of starting out as a freelancer—but it’s arguably the most important. So, create a solid budget, have a back-up plan, and prepare for the future—and then you can enjoy the fact that you’re out on your own!
Little brings Emily more of a thrill than taking a so-so sentence and making it shine or giving an alright paragraph more of a punch. She’s a self proclaimed word-nerd whose penchant for language took her from barista-ing in a bookstore café during college to serving as a Fulbright English Teaching Assistant in a high school just outside of Madrid after graduating with a double major in English and Spanish. Since returning to the States over a year ago, Emily has worked as Associate Editor for The Daily Muse and established a Spanish language social media presence for one of Southwest Michigan’s leading credit unions. Recently married, she, her hubby, and their crazy cat, Angel, call the shores of Lake Michigan home.More from this Author