Creating Annual Budgets on Freelance Income

There are many beautiful aspects to working as a full-time freelancer. The freedom of working when, where, and for whom you want is something that simply cannot be matched by any salaried position. However, it is important not to let that fantasy get in the way of this reality: full-time freelancing simply does not have the security that comes with a guaranteed paycheck. There will be lean times, and it is important to be prepared for them if you want your freelancing career to be sustainable in the long-run.

An ounce of prevention is worth a pound of panicky scrambling for rent money, so here are some things worth thinking about before that revenue stream temporarily dries up. Take these into consideration, and you’ll be more likely to make those dollars stretch to the next gig.

Create a realistic budget, and live by it.

When the jobs are rolling in, it’s easy to feel like things will never change. But there are a lot of expenses to take into account when crafting a budget, and it’s crucial that you include the reality of fluctuating cash flow. Take the time to write out two budgets: one that consists of only your absolute, bare-bones, must-have essentials; and another that includes your desired lifestyle expenses. This gives you a baseline for the absolute minimum you can realistically cut back to when necessary, and a guideline for how much you can afford to spend when things are going a little better.

Pay yourself a salary.

When the jobs start to roll in, you might experience what feels like a windfall of cash. But remember, cash flow in a freelance business is not going to have the consistency of a 9 to 5 paycheck.

One way to establish some consistency is to pay yourself a monthly salary. Establish a separate business account, and set up a monthly transfer from this account to your personal checking account. Pay yourself enough to cover your budget, and get yourself into a mental space where the money is not “yours” until it has been paid to your personal account.

Establish a prudent reserve.

Once you have established your monthly expenses and started “collecting” a salary from yourself, work towards building a prudent reserve into your savings; that is, enough money to cover your absolute necessities for one month if you didn’t take in any more cash. Never touch this money, unless that worst case scenario actually rears its head. It can be tempting to spend it, and easy to justify when you feel like you are investing in your business by purchasing office supplies, marketing/promotional materials, or improving your mental health through self-care purchases. However, it is critical to remember that periods of little to no cash flow are not matters of if, but when. This money will be an absolute lifesaver when those periods come around.

Establish an emergency fund.

Additionally, start to build a separate emergency fund. Your goal should be to have an account with about six months worth of expenses saved; however, even starting with a smaller goal of $2,000 — $3,000 will put you in a much better position than having nothing. Cars break down. Kids need braces. Clients disappear without paying. The amount you will want to have here will vary from person to person, but it is important to have a piggy bank that you can smash into when necessary, so that you don’t end up draining your main account to fund an emergency during a period when the cash is simply not coming in.

You might be thinking to yourself, “Gee, thanks. Take a bunch of money and don’t spend it? Real helpful.” I agree, this is not something that is going to be easy. But it can be done. It takes conscious effort, it cannot be done overnight, and it may require cutting back on some lifestyle expenses for a while. But no one said running your own business would be easy, right? Building an emergency fund is an exercise in experiencing some short-term pain in exchange for establishing some long-term security.

Here are some strategies for jump-starting your savings:

• Minimize your living expenses. Eat out less, go for a hike instead of going to a movie…the basics.
• Pay with cash, and stick the change in a jar (stick the one dollar bills in there, too). Once a month, deposit the jar into your savings account.
• When you get “free money,” (a tax refund, birthday money, returned purchases, bonuses at work), stick it in your savings instead of splurging.
• Put savings on auto-pilot. Set up an auto-transfer so that each time you get a paycheck, $50 goes right to your savings. If you get paid twice a month, you’ll have $1,350 at the end of a year!

Don’t quit your day job (yet).

If this advice feels impractical (or even impossible), then you might want to consider keeping your job with a full-time paycheck just a little longer. The security of knowing exactly how much money will be coming in will make it easier to build contributions to your savings into your budget.

Not that you shouldn’t start freelancing on the side. On the contrary, starting to do some freelance work will help build your portfolio and give you the experience you need to charge the rate you want when it does come time to jump into freelancing as your full-time gig.