How To Manage Your Money As A Freelancer With Fluctuating Income
/Managing and growing your wealth is challenging for many of us even when we have a steady income. When you have variable income as a freelancer, it becomes even more tricky to manage your money. If you are currently working as a freelancer or aspire to be one at some point in your career, then here is a step by step guide for managing your money as a freelancer with fluctuating income.
Create a spending plan and review it consistently
While budgets work for some people, I prefer to use the term “spending plan”. It feels less restrictive and more expansive. If you prefer to use the word budget, then feel free to substitute throughout this section.
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Creating a spending plan is the most important step you can take to manage your money as a freelancer with a fluctuating income. It brings awareness to your financial decisions and is the foundation for pricing your services and setting financial goals.
When you have fluctuating income, it is challenging to build a plan because you literally have no idea how much you may earn one month to the next. This is why I recommend building a recurring revenue stream in the Financial Foundations for Freelancers training in the Money Makers membership program. I go through step by step how to create consistent income as a freelancer.
However, even if you don’t have consistent income (yet!), you do have consistent expenses. Oh, the joys of consistent expenses, right? Once you are clear on how much you spend each month, you can build your plan around this information. Knowing this number will help you determine the minimum amount of income you need to generate each month and this information will help you set your pricing as a freelancer.
There are different strategies you can apply to your spending plan to determine how to allocate your finances. You just need to find out which one works for you. Whichever method you choose, make paying yourself, your savings, and your investment accounts, the top three priorities. Investing can be anything from traditional investment vehicles to investing back into your business.
One method you can try on for size is the 50/30/20 approach, where you allocate 50% of your income on necessary expenses, 30% on discretionary expenses, and 20% on savings. Once you have created your spending plan, have a weekly money date to review how the method is working for you and if any adjustments need to be made.
Set aside money for taxes
Unlike traditional jobs where taxes are already taken out before employees receive their paychecks, freelancers have to set aside money for taxes to pay during tax periods (usually each quarter). If you do not set aside money for taxes, and your money gets spent on other things, you may find it harder to find the money to pay your taxes.
But if you set aside money for taxes, you will have all the money you will need to pay your taxes by the time the tax bill rolls around. You can create a tax fund and set aside money each month into this account.
Prioritize your savings account
When you have a fluctuating income, it is extremely important to build a cash cushion. Having a well-stocked savings account will help you keep afloat when you experience a reduction in your income longer than anticipated or when clients take their sweet time to pay your invoice.
How much money should be in your savings account? Many financial experts advise to set aside three to six months' worth of living expenses. However, if you are a freelancer, you might want to stash away at least nine months' or a year's worth of living expenses in your savings account.
When I first started building my savings account my goal was to get it to $1,000. Now I maintain a year’s worth of savings in the event that I wish to take a year off.
Pay yourself first
One of the most effective ways to stay on top of your finance and build your savings is to pay yourself first. When you pay yourself first, it is a "set it and forget it" kind of thing that will not have an impact on your lifestyle. I view paying myself first as two-fold: paying my savings account and also giving myself an allowance to treat myself to something fun.
Be sure to prioritize this (there’s a reason the word “first” is in the headline) because if you wait until the end of the month to see how much money you have left to save, you may not have anything left to put into savings. Once you have decided to pay yourself first, make it automatic.
Set up an automatic transfer of a certain amount of money from your business account to your personal account. That way you can pay yourself first.
Build a sunny opportunity fund for your business
One of my biggest pet peeves is when I read the phrase “save for a rainy day”. Words are power and you’re basically speaking into existence that a rainy day will arrive. Therefore, I prefer to use “save for a sunny opportunity”. This isn’t to say that challenging times won’t occur, because they absolutely do. But, in my experience, saving for a sunny opportunity has led to exciting experiences and has also allowed me to be prepared for rainy days.
Once you have a steady flow of income as a freelancer, even if it fluctuates, I encourage you to keep separate savings for your business. Try to set aside a few months' worth of business expenses. Doing this will allow you to cover any unexpected expenses that arise and/or delayed invoice payments in your business without dipping into your personal savings.
You can create a separate account in your online savings account to cover your business expenses and keep track of your business expenses.
Set payment deadlines for your clients
When you are working with multiple clients, it is important to set payment deadlines for your clients so they know when to pay your invoice.
Some clients may delay in paying for your work when you need the money fast. But by setting clear payment deadlines and conditions on your invoices for your clients, they will make sure that you get compensated for your work on time.
Also, do not be afraid to send a reminder if the deadline of paying your invoice is approaching or has just passed.
Increase your freelancer rates
Are you charging less than what your services are worth? If you think you have been providing valuable services to your clients but you are not being paid fairly, then do not be afraid to increase your freelancer rates.
If you take what you get just to keep their business, you will feel burnt out sooner than later. Instead, simply gracefully and professionally let your clients know that your rates are going up soon. Just make sure to give notice in advance. If your clients are happy with your work, this means you are providing a quality service and your clients will probably be willing to accommodate your request. If they are not willing to do not be afraid to walk away. Underpaying clients are a headache you do not need in your life. I speak from experience!
Set up a retirement savings plan
As a freelancer, you are on your own to save for retirement, unlike traditional employees who have access to an employer-sponsored 401(k) savings plan. But as a freelancer, you have far more ways to build your nest egg than traditional employees. But that does not mean, it is necessary to create multiple savings accounts for retirement.
One of the best options could be to set up an independent retirement account (IRA) with a reputable company and automatically set aside some money, if you can afford it, to go into your IRA each month. Other retirement savings plans for freelancers or self-employed people worth considering are the SEP and the Solo (401k) plans.
The earlier you start, the larger your retirement savings will grow.
Find a health insurance plan
Finding an affordable health insurance plan that meets your needs will bring peace of mind in the event you are unable to work due to health concerns and/or incur an unexpected health expense. Once you have found an affordable health insurance plan that meets your needs and purchased that plan, all you need to do is to fund it automatically every month by setting up an automatic direct debit to pay the monthly bill.
Buying a health insurance plan will provide you with peace of mind, knowing you will be covered in case something goes wrong even if you are living on a fluctuating income and may save you a lot of money in the long term.
In conclusion
If you are drawn to freelancing, I hope the above step by step guide for managing your money as a freelancer with variable income will help you stay on top of your finances. If you make a spending plan, prioritize your savings and investing, and get creative with making money, you will be well equipped to handle money as a freelancer with fluctuating income.
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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
