How To Create a Budget as a Freelancer

Freelancing is an increasingly popular way to earn a living. According to Upwork, 38% of workers are engaged in freelance work. 

While freelancing can be a good way to earn money, budgeting around an irregular paycheck can be challenging. These 10 steps will help you better manage your finances as a freelancer.

1. Understand Your Cash Flow

Freelancers earn inconsistent income. Instead of getting paid every other week or every month, freelancers get paid when clients pay their invoices. This can create problems when bills are due but clients pay late.

To create a budget as a freelancer, you first need to understand your cash flow. This is how much comes in and out of your bank account each month.

Look at invoices from the past three months:

• How often are you getting paid? 
• How much income is coming in with each invoice? 

Take note of this to know how frequently you’re getting paid.

2. Calculate Your Average Monthly Income

From your invoices, calculate your average income. Some months you’ll earn more than others, but an average will give you a metric to budget against.

Let’s say:

• Your first month of freelancing you earned $5,000
• Your second month you earned $2,000
• Your third month you earned $10,000

Across those three months, you earned $5,666 on average. Build your budget around this figure.

COMPARE: Best Bank Accounts for Freelancers

3. Set Aside Money for Taxes

When you’re a freelancer, you’re responsible for paying your own taxes. The company you’re working with won’t withhold taxes for you.

Once you know how much you’re earning each month on average, you can calculate how much you need to set aside for taxes. This will make it easier to pay your taxes throughout the year.

Freelancers are expected to pay estimated quarterly income taxes. These payments are due:

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15 of the following year

An easy way to calculate your taxes is to multiply your monthly average income by 12. 

For example, if you earn $5,666 per month, that’s an annual salary of about $68,000. 

Your taxes will vary depending on where you live, but on a $68,000 salary, expect to pay around $12,000. 

Divide that by four and you would owe around $3,000 per quarter.

In addition to income taxes, freelancers are also responsible for paying a 15.3% self-employment tax. This covers taxes going to Medicare and Social Security, which an employer would usually pay on your behalf. 

To make sure you have enough set aside, take 20-30% off of each invoice you receive payment for. You can park this money in a high-yield savings account until you’re ready to pay your taxes.

By doing this you’ll not only keep Uncle Sam happy, but you’ll have a clearer idea of what your actual take-home income looks like.

4. Save for Emergencies

As a freelancer, you’re exposed to different types of risk. You might not have health insurance or a client could drop you with no notice. 

You’ll want to prioritize an emergency fund to offset these risks.

Most financial experts agree you should save around six months’ worth of expenses in an emergency fund. If your monthly expenses come to $5,000 a month, you’d need to have $30,000 saved up in an emergency fund.

Start small. Commit to saving 1-5% of each invoice you receive for emergencies. 

Similar to your taxes, set this money aside in a high-yield savings account to earn interest on your savings.

READ MORE: How Much Should I Put In My Emergency Fund Per Month?

5. Plan for Retirement

One of the downsides of freelancing is that there aren’t any employer benefits. You’re responsible for everything, including saving for retirement.

Depending on where you’re at in your freelancing career, try to save 1-10% of each invoice for retirement. 

As a freelancer, you can set aside savings in the following accounts:

• Solo 401(k)
• Traditional IRA
• Roth IRA
• SEP-IRA

Each account type has different rules and benefits. Some allow you to deduct your contributions, which can reduce your tax bill come tax time. 

If freelancing is a sizable portion of your annual income, it’s a good idea to work with an accountant. They’ll not only help you maintain your books, but they can help you ensure you’re taking advantage of tax benefits as well.

RELATED: How To Save for Retirement Without a 401(k)

6. Create a Budget for Your Known Expenses

Now that you know what you’re bringing in each month on average and you’ve deducted money for taxes, retirement, and emergencies, you can begin planning a budget.

Your budget should include business expenses, fixed expenses like rent or a mortgage, and discretionary expenses like going out to eat.

Because freelancers aren’t paid consistently and often struggle with cash flow, it’s important to prioritize your expenses. 

Start with your known expenses. These are bills that come at the same time each month and you know exactly how much they’ll be.

Common known expenses include:

• Mortgage/rent
• Insurance
• Subscriptions
• Utilities
• Cellphone
• Minimum debt payments

By prioritizing your known expenses upfront, you’ll have a better sense of how much is left over for everything else.

7. Create a Budget for Discretionary Spending

With your remaining income, create a budget around discretionary spending. This includes things like:

• Groceries
• Gas
• Dining out
• Entertainment
• Clothing
• Home items

You’ll want to calculate these things last because most of the time discretionary expenses are in your control. If you have a bad month, it’s easier to cut back on dining out than it is on rent.

8. Save the Rest for Future Spending

As a freelancer, you’ll have months that might be lower and months that might be higher. Create a sinking fund to create a buffer for future expenses. 

Add any leftover income to this sinking fund. That way you have a source of cash to tap in when work slows down or if you want to take some time off.

9. Track Your Spending

Cash flow is hard to manage as a freelancer. It’s a good practice for anyone to track their income and expenses, but it’s really important to do this as a freelancer. 

You can use a budgeting app to keep track of your expenses. As you collect information about your spending habits, you can tweak your budget to help with ebbs and flows in your income.

10. Invest in Professional Help

Working with a certified financial planner (CFP) or certified professional accountant (CPA) can help make sure you’re taking advantage of all your tax write-offs and you’re working towards future financial success. 

They can advise you on strategies to help you improve your bottom line and earn more as a freelancer.

TL;DR: Creating Your Freelance Budget

Budgeting as a freelancer requires careful planning and financial discipline. 

Track your income, set aside money for taxes (20-30% of each invoice), build an emergency fund (aim for six months of expenses), and prioritize retirement savings.

Consider working with a financial professional who can help optimize your finances and maximize tax benefits, ensuring you're prepared for the unpredictable nature of freelance work.

For more tips on managing your money as an entrepreneur, check out these episodes of the Erika Taught Me podcast:

• 99% of Business Owners Make This Mistake
• Brutally Honest Business Advice to Get to $1B
• Do THIS To Become a Millionaire

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