Hi Ruth,
I’ve recently started freelancing, and while I love the flexibility, managing my finances is becoming a real challenge. My income is irregular, and I’m finding it hard to budget or plan ahead when I don’t know exactly what I’ll make each month. I want to build a more stable financial foundation, but feel stuck in a feast or famine cycle. How can I manage my finances better with this kind of Income?
Freelancers often pursue working for themselves because they want freedom and flexibility to do the work they get a kick out of doing at the pace and place they like to do it. As someone who does freelance work, I know firsthand that there is much to love about working this way.
While the flexibility and variability of freelancing are its greatest strengths, they can also be its downfalls. Managing your money as a freelancer requires the complete opposite! You need certainty, structure and good budgeting to make it work. If you can’t find a way to even out the peaks and valleys of your income, then all that lovely flexi-time you have worked into your day will be invaded by stressful worrying about your finances.
With planning, you can create a system that replicates the stability you used to get from your employer when you knew that a set amount of money would be sent to your bank account on a specific date and time. You can pay yourself a reliable income and plan ahead.
I have applied the same PocketSmith budgeting skills that I use in my private finances to my business. This is how I suggest you do it.
Open one to five bank accounts with a new bank. It is important to separate personal and business banking as they are different entities.
Bank account:
*I use the accounting software Hnry, and I pay my taxes as I go. This has removed the need to save for tax which makes allocating my income to business expenses, holiday pay and myself so much easier. Most importantly, I can tell if my business is profitable.
Create a new PocketSmith dashboard exclusively for your business. At a glance, you can see your cash position, incomings, and outgoings, and you can also create detailed reports to help you budget better.
Avoid running your bank accounts too lean. Before moving to full-time freelance work, I built up an additional two months of income and expenses in my #1 account. I also created an emergency fund. You will find this particularly useful in the first six months as it will remove the anxiety you currently feel about running out of money. Aim to hold plenty of cash in your business. If you have to use your emergency fund, restock it as quickly as you can. As your confidence in your income and expenses grows, you can adjust the amount you keep in reserve.
You were paid a fixed amount when you worked for an employer, so do the same now that you are self-employed. I like to pay myself weekly. Once up and running, create a weekly payment from your business to your personal account and into your business expenses, tax and holiday pay accounts.
Knowing you will have money coming into your personal accounts each week evens out the peaks and troughs of spending and earning, making your household budgeting far easier to manage.
Initially, you will be working hard to build up your emergency fund and cash buffer, so calculate the lowest amount your business can afford to pay you weekly while still meeting those other goals. You can now be confident you will be paid a fixed amount on the same day each week.
Pay yourself the minimum amount you can for a solid three-month period (longer if you can), as that gives you time to see how much, on average, your business earns and spends. It will help you begin to predict boom or bust periods of work.
Adjust transfers into your tax, expenses and holiday accounts until you have them right. Setting aside a weekly amount will make your budgeting easier. Some months, you may ‘oversave’, but others you may ‘undersave’. But over a tax year, it evens out.
You must set money aside now for future holidays, and you need to write holiday dates on your calendar. You will soon settle into paying yourself a set amount each week, and you need at least four times this weekly amount set aside for future holidays. For example, if you pay yourself $1,000 a week, you need $4,000 saved. When you take a week off, you pay yourself $1,000 from this account. $4,000 / 52 weeks means you need to transfer $77 a week into your holiday account to ensure you can cover four weeks’ holiday after one year of working.
As long as you never stop setting aside $77 a week, you will always have four weeks of paid leave to look forward to. This will guarantee you never miss out on a weekly income in your personal bank account.
Most freelancers find there are periods, such as Christmas and New Year, when all their clients seem to desert them. They wonder if they will ever come back. They will; they are just taking a well-earned break! Try to take your holiday when your clients do and use your holiday pay to ensure no income gap. Keeping a good cash buffer in your bank account, plus keeping an emergency fund acts as a backup plan during quieter periods.
If your #1 account balance grows with each month, and you have a lot of money sitting there, increase your weekly pay by a small set amount, e.g. $50 or $100, and then monitor it. Think of it as giving yourself a pay rise.
I would caution against giving yourself a chunky bonus. Instead, try to increase what you can consistently pay yourself. Remember that holding more cash in the business will help smooth out your irregular income and help you sleep better at night.
PocketSmith will give you an accurate picture of your net income after taxes and expenses. Regularly review your figures and be honest about whether freelancing is financially viable. Working for yourself can be expensive. All those costs your employer once paid for, well, they are now all on you. After a year in business, and once you understand your income and expenses, reevaluate if you have a business or a hobby.
If freelancing is viable, then permit yourself to relax.
When you work for someone else, your paycheck is no more guaranteed than a freelancer. At any time, you could be let go. By freelancing, you are generating and controlling your income meaning that you can directly influence earning more or less. Instead of feeling threatened, you should feel emboldened and once you put some structure in place I think those financial peaks and valleys will be a thing of the past.
Got a burning money question for Ruth? Send them through to [email protected]!
Ruth blogs at thehappysaver.com all about how she and her family handle money. What’s the secret? Spend less than you earn, invest the difference, avoid debt and budget each dollar that flows through your hands. She firmly believes that if you can just get the basics right, life becomes easier from there on in.
