Around 55% of Americans are not in the practice of creating and maintaining a monthly budget, according to The Penny Hoarder. Another 56% do not even know how much they will spend in a typical month. Woah, right?!
However, there’s a bright side to this survey. The respondents who are intentional, consistent budgeters report a much lower tendency to splurge on purchases and then run out of money to cover their bills. The lesson here: budgets are crucial—especially for freelancers with paychecks that often change from one month to the next.
We are major advocates of the freelance life here at The SunDaze Journey, but we’re also no strangers to the financial complications that sometimes result from a fluctuating income. As a freelancer, you will need a money management plan that’s twice as conscientious and strategic as someone with a steadier source of cash flow.
Budget Tips for Freelancers
After all, the tradeoff of a flexible work model is ensuring you have enough in the bank to actually sustain this model long-term. So on that note, here are five budget hacks for freelancers to build smart money habits and win at financial stability.
1. Use a business bank account for your work finances.
Before you do just about anything else, move your personal and professional finances into two separate accounts. This will make it so much easier to track how much you earned when tax season rolls around. If you use the same bank for both your personal finances and freelance payments, create a business account, and ask clients to funnel all electronic transfers or direct deposits there, instead of into your normal checking account.
If you want to be even more organized, you can also open a business account with a “boutique” bank—such as Oxygen or Axos—that specifically caters to the needs of freelancers and small business owners. One upside to this less conventional route is you often won’t be charged the service or overdraft fees that come with larger banks.
No matter how you choose to do it, a clear delineation between the two accounts will help you visualize how much to save for business and living expenses, versus how much you can spend for personal reasons.
2. Save a percentage of income each month for taxes.
Ask almost any full-time freelancer who’s been in the game for more than a year, and chances are, they will confirm that taxes are responsible for most of their financial headaches. 1099 (a.k.a. independent contractor) taxes are complicated, so it’s essential to plan ahead for this in your budget. As a freelancer, you’ll owe 15.3% of your annual net earnings, broken down into three categories—self-employment, social security, and Medicare taxes. That’s on top of the regular income taxes you will also need to fork over.
Since most freelance paychecks do not withhold a portion for taxes (unlike normal W-2 jobs), it’s important to form a habit of doing this yourself. Earmark around 25–30% of your income each month and transfer it to savings. This way the total lump sum you need will be available when the time comes to file your tax return. Otherwise, you’ll be scrambling at the last minute to find enough money to keep those IRS collection calls off your back. Avoid the stress of a tax season that catches you off-guard—prepare in advance.
3. Keep tabs on all business expenses for tax write-offs.
As much of a logistical hassle as freelance taxes can be, there are silver linings in the form of write-offs. As an independent contractor, you can subtract numerous business-related expenses from your overall tax return and soften the blow to your savings account in the process.
Many freelancers have no idea the amount of write-offs they’re eligible for which results in overpaying on their taxes—so don’t fall into this trap. Be aware of which deductions you can claim and track these expenses during the year (future you will overflow with gratitude!).
Potential (not guaranteed) tax write-offs
- Home Office: a portion of rent or mortgage costs, water and electric utilities, property taxes, and renter’s insurance (in some cases)
- Health Insurance: medical, vision, or dental premiums if obtained in the marketplace or through a private insurer outside of your employment
- Continuing Education: tuition, school supplies, textbooks, lab fees, and transportation to classes if the program relates to your current job
- Vehicle Miles: fuel, oil changes, depreciation, insurance, parking fees, toll costs, and license or registration fees based on miles driven for work
- Retirement Savings: pre-tax contributions to an IRA or solo 401(k) retirement account
- Self-Employment Taxes: half of the total self-employment tax (recall: 15.3% of your net earnings) taken as an income tax deduction
- Office Supplies: computer and technology depreciation, writing utensils, postage, office materials, and professional books or magazine subscriptions
- Credit or Loans: interest accrued from business expenses or loans on your credit card
- Phone and Internet: a portion of phone and internet bills if used for work (you can write- off the entire bill for a specific business only line)
- Work Travel: flights, hotels, public transit, meals, and other basic non-entertainment travel expenses for a legitimate business trip
- Start-Up Costs: website creation and hosting, software platforms, business licensing, marketing fees, and coworking space rental
- Business Memberships: fees to be part of board associations, chambers of commerce, trade or business leagues, and public service organizations
- Charitable Donations: contributions to a nonprofit organization, faith-based institution, or charity event (check for “tax-deductible” on the donation form)
- Qualified Business Income: 20% deduction on all taxable income if you earn $164,900 or less a year (or $329,800 for a joint filing household)
4. Create a buffer fund to cover you during lulls in work.
Here’s the reality of freelance life: it is unpredictable. Some months, you will rake in the projects and have enough cash in your account for a weekend trip to Vegas. Other months, your clients will throw just a couple assignments at you. Such is the fluctuating nature of this work, but no matter the season, there are bills to be paid. For those lean stretches when you could use some extra cushion to tide you over, a buffer fund comes in clutch.
It’s worth noting, a buffer fund is not the same as an emergency fund which, if possible, should cover at least 3–6 months of living expenses in case a dire financial situation occurs. A buffer fund is much smaller (think: $200–$500 to start with)—but it’s there to offer a supplemental boost if your income is lower than usual one particular month. As a general rule, transfer some money from each paycheck into the buffer account. Even if all you can manage is $20 here or $50 there, the consistency will make a difference over time.
5. Don’t overlook the importance of saving for retirement.
If there’s no line item in your budget for retirement, now is the time to change this. The future of social security is unreliable—in fact, research shows that SSA reserves will run out within the next 15 years, at which point, your annual taxes will cover just three-quarters of SSA retirement benefits moving forward.
Retirement Savings Options:
This isn’t exactly the most reassuring news, but you can still plan for the inevitable with your own retirement savings. As a freelancer, you won’t have access to an employer-sponsored retirement fund, but there are alternative options:
Traditional IRA –
With this account, you can contribute a maximum of $6,000 per year ($7,000 once you’re over the age of 50), and a portion of those contributions are tax deductible. You will not be taxed on gains unless you make an early withdrawal from the account before retirement (which can accrue a 10% penalty).
Roth IRA –
With this account, you can also contribute a maximum of $6,000 per year ($7,000 once you’re over the age of 50). Where a Roth IRA differs, however, is that your contributions are not tax deductible, but you can withdraw money from this account before retirement without being penalized on your tax return.
Solo 401(K) –
With this account, you can contribute a maximum of $61,000 per year, but since a Solo 401(K) considers you both an employer and employee of the business, there are limits to how much you can contribute in each role. For instance: as an employee, the maximum contribution is $20,500 (or 100% of compensation, whichever amount is less).
And as an employer, the maximum contribution is 25% of your net self-employment income. You can also choose to take advantage of tax write-offs (as with a Traditional IRA) or no tax penalties (as with a Roth IRA).