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Freelancing income will never be as regular as a steady paycheck. It will always fluctuate based on the needs of your clients. But while you might not be able to calculate your exact income from month to month, you should still be able to make a budget that takes into account your clients so you know whether you’re on track for your financial goals or whether you need to make an adjustment.
We can easily think about $100 because it’s within reach. We can easily think about $1000 because it looks like an attainable goal, but it becomes hard to conceptualize large amounts that we do not readily have access to. That’s why all freelancers have to make a budget as well as an income sheet.
Understanding Where You Are
To be able to manage your finances, you need to be aware of what both your income and expenses are. This is crucial because you need to know where you stand before you can move forward.
Calculating Your Freelance Income
In your client mix, you (should) have regular clients and one-offs. Make two columns on a piece of paper. On one side, list your regular clients and their projected monthly income.
For the one-offs and the non-regulars, make another list in the second column of these and how much you’re expected to get. Total all the money in this column and halve it, then add it to the first column. The halved total from column two is an assumption of how much you’ll make assuming marketing efforts remain the same while also building in a buffer for a slow month. If you have the data for multiple months, you could even take a three-month average. This is your income sheet.
Calculating Your Expenses
We’ll assume that you already know how to make a basic budget. Working as a freelancer means that you’ll be paying both personal expenses (power, water, food, car, etc.) and business expenses (taxes, insurance, software, equipment, etc.) You will need to keep a clear and separate budget for both areas to avoid confusion during tax time.
The advice that many give when managing finances as a freelancer is to create separate accounts for personal, business, and savings. The bank loves setting up these types of accounts and will often give ‘discounts’ based on having multiple accounts. They will often waive fees and occasionally offer a very tiny amount of interest.
Take the past few months of financial statements and calculate the average you’ve paid for each area of spending. Be sure to add 25% of your income as an entry for taxes! You can use software like Mint.com to pull in your financial statements to get a more accurate number if you don’t want to estimate. If you have your accounts separated and use them for what they are intended for, it will be easy to keep your expenses separate.
Managing Your Taxes As a Freelancer
As an employee, tax money was automatically deducted from your check before it got into your hands. Usually, the difference between what you earned and what you really made was about 15-25%. As a freelancer, you’re responsible for setting that money aside yourself. Setting aside money for taxes is a must for any freelancer right from the beginning.
For some, it’s incredibly difficult to put money aside for taxes. There are so many temptations. But it just takes one brush with the IRS to know just how serious it can be if you don’t pay up. Interest and penalties are no joke. That’s why setting up a savings account just for taxes is a smart idea.
Separating the Accounts
When you have separate accounts, it’s easy to dole out percentages of your payments into each account. For instance, you can put 60% of your income into your main account, 15% into your business account, and 25% into your tax account. But it can be tricky to remember to do this separation. It’s so tempting to just take a smidge more money so you can have some extra spending cash. This is the road to not having enough money for taxes come quarterly.
Imagine being able to take out taxes just like an employer so that you wouldn’t have to worry about them as much when quarterly taxes were due. That would definitely be a load off the mind and it would make managing your finances easier. You wouldn’t have the ‘hidden’ tax cost looming over your budgeting.
Well, we found a way to separate out the expenses. It takes a little bit of setup, but once it’s been established, taking out money for taxes (and making it inaccessible until the time) becomes automatic. It’s a service called Painless1099. Basically, you set up your income to go through them, it will take the percentage out that needs to go to taxes, and you receive the rest to apply to your personal and business expenses. When taxes are due, you just have the IRS withdraw directly from your Painless1099 account and you don’t have to worry about it anymore. It’s truly painless.
By keeping an updated income sheet, a budget, and three accounts, you can easily see whether or not you’re making enough money to cover your expenses. If your income sheet is too low, it’s time to do more marketing. Separating your accounts and setting a percentage of income keeps you from spending too much in any single category. And with Painless1099, you can ensure that your taxes get paid too.
Balancing your income as a freelancer is tricker than it was as an employee, but you get a lot more flexibility in return. If you want to retain the freedom of a freelancing life, you need to learn these skills to ensure you don’t end up in a place where you have to go hat in hand back to an employer. Make an income sheet and a budget today. Taking an hour or two to get a clear picture of your financial health is well worth it.