Are you nervous about giving up a regular paycheck for one that fluctuates month to month? Don’t know how to track your income and expenses? Not sure how to manage your freelance budget?
You’re not the only one! This uncertainty stops a lot of wannabe work-at-home heroes from starting their freelance businesses. You can make this change feel a lot less daunting if you plan for it.
Eric Goldshein from Fundera is showing us how we can manage our freelance budget and make it work for us.
Take it away, Eric!
How to make your freelance budget less of a guessing game
As a freelancer, you are your business. Because of this, your freelance budget is almost synonymous with your own personal budget. This overlap of the personal and the professional makes budgeting even more important than it would be if you weren’t self-employed.
If you’re not keeping things tidy with your freelancing budget, your finances could soon unravel. Making your freelance budget less of a guessing game every month, quarter, and year is crucial to your long-term financial security.
Once you master your freelance budget, you can focus on growing your freelance business and surpassing your expected revenues. But, first things first, let’s cover the tenets of making your freelance budget as predictable as possible:
Track your cash flow
As with any business, your freelancing career requires a broad snapshot of its financial health. Calculating and keeping an eye on your cash flow—the money coming in and out of your freelance budget in a given time frame—can help you do just that. Cash flow tells you what kind of money you have on hand and allows you to understand how, and when, money flows into and out of your freelance budget.
To calculate your cash flow for a specific window of time, you subtract your total expenses from your total revenues within that time. Remember: The revenues you plug in need to be actual revenues, rather than projected revenues. For instance, if you have a few invoices outstanding, those amounts won’t factor into your total revenues for your cash flow calculation.
Document your business expenses
Cash flow reports provide a helpful view of your freelance budget. But you’ll need to get a more detailed snapshot of your freelance expenses.
Keeping a detailed log of your business expenses is crucial for tax reasons. In order to write off whatever purchases you have to make for your business come tax season, you’ll need to keep track of them.
Many accounting software options that cater to freelancers offer deduction searches that sift through your bank statements, to help you find expenses that appear to be business expenses.
A more affordable alternative to tracking your business expenses is simply opening up a separate bank account, whether it’s a new business checking account or a new credit card account. Put all your business expenses on this new account, and you won’t have to do the work to sort them out later.
This expense tracking can also help you keep an eye on just how much you’re spending on your freelancing projects. Check in regularly to see what your freelance expenses are adding up to, and make sure they line up with what you projected them to be. If they aren’t, then you should adjust your estimates and rates accordingly.
Find an ongoing gig with an anchor client
Unfortunately, freelancing work can sometimes be an all-or-nothing situation. One month, you might turn away clients because you’re too busy. The next month, you might scrape the barrel for work.
Getting ongoing projects with an anchor client or two can help offset the unpredictable nature of freelancing. Anchor clients are businesses and clients who offer you a steady flow of ongoing work, providing you with predictable income from month-to-month. Having an anchor gig can help even out your freelance budget and generally make your life a lot less stressful.
Set aside money for quarterly taxes
Don’t forget to set aside a solid portion of your freelance income for your quarterly taxes. Calculating your quarterly taxes for freelancers requires a bit of math, but setting aside around 30% of whatever you make should put you in a good position to afford those seasonal sums.
When the time comes to pay the IRS, be sure to make exact calculations, though. If you need a little help, many accounting software options designed for freelancers can calculate your estimate for you. From there, you or your accountant can check the math and pay the appropriate sum online through the IRS payment portal.
Purchase business insurance
Finally, business insurance can help shore up your freelance budget for potential liabilities in the future. By buying business insurance policies like general liability insurance and professional liability insurance, you can protect your freelance and personal assets from business liabilities like lawsuits, injuries, or property damage.
It’s unlikely that a proofreader, editor, or anyone else in the letters business will be the subject of a lawsuit based on an injury—which general liability insurance would cover. Professional liability insurance, however, can cover you in the event of a negligence-based lawsuit, or a contract dispute. Some clients may require you to have insurance.
Next steps for nailing your freelance budget
Now that you’re familiar with the best ways to make your freelance budget more predictable, what are your next steps? If there are any of these key steps you haven’t done yet, get ready to take action.
Whether you need to open a new, business-specific spending account, or you want to find accounting software that offers quarterly tax estimate calculations, these steps are simple and low-cost. All that’s left is to make some moves. And you already know you’re good at that; it’s what made you a freelancer in the first place.
Eric Goldschein is an editor and writer at Fundera, a marketplace for small business financial solutions such as small business loans. He has nearly a decade of experience in digital media and covers entrepreneurship, marketing, financing, and small business trends.
There you have it! Your freelance budget doesn’t have to be a source of worry or overwhelm. If you put steps in place to manage your budget, you’ll feel a lot more confident every month and come tax time.
Haven’t started your freelance career yet? Check out our free Intro to Proofreading workshop to see if proofreading could be the right fit for you!