Getting started as a freelancer? Here are your budgeting must-haves.
When I took the leap into full-time freelancing about two years ago, I was fully aware of the downsides of being self-employed, such as variable income, having to pay for your own health insurance, and so forth. But it took a good year or so of adventures—and real-life experience—as a solopreneur to learn how to budget better.
To spare you from some of the growing pains I went through, here are a handful of tips on budgeting for freelancers:
An Emergency Fund
Also known as a f**k off fund, or a rainy day fund, an emergency fund will help you cover costs if something unexpected goes down. As far as budgeting for freelancers go, I can’t stress the importance of a rainy day fund enough. It helped me big-time when I was faced with a hefty $2,000 medical bill a few years back (more on that later).
While I would recommend socking away anywhere from six months to a year of your basic living expenses, if you can’t swing that, start with a smaller savings goal. Even three months is a solid start. The important thing is that you make it a priority to save, and that you begin saving as much as you can now.
A Mini-Buffer Fund
The difference between a main emergency fund and a mini-buffer fund is that the mini-buffer fund is there to tide you over if you’re waiting on checks from clients or are having a slow month.
Whereas a main emergency fund may have several months of basic living expenses, your mini-buffer fund may have anywhere from a few hundred dollars to one month’s living expenses. I also have different rules as to when to use money in my mini-buffer fund versus my main fund. For instance, I’ll use my mini-buffer fund to get me through a slow month or pay for sundry supplies or equipment for my business. And I’ll pull funds from my main emergency fund for more traditional emergencies, such as medical bills or a car repair.
So why have a mini-buffer fund in the first place? There’s two reasons: The first is that it’s easier to get to than your main fund. I usually keep this reserve of cash in the savings account that’s linked to my main checking. The second is purely psychological. I often experience a wave of regret and panic when I need to tap into my main emergency fund. Maybe it’s the fear that once I tap into this fund, it’s all downhill from there.
Getting Ahead One Month on Your Expenses
In other words, by the end of the current month I’ll have enough to cover the next month’s living expenses. This has helped me tremendously with variable income. When I deal with cash flow issues or lags in payment, getting one month ahead of my bills helps me stay on top of things. Plus, I can still set up autopay for my major bills.
The beauty of getting ahead one month is that you only need to save up for this once. After you have one month’s worth of living expenses saved, that sets you up for getting ahead indefinitely.
Self-Employment Taxes Fund
This might be one of the least fun savings funds ever. But when you freelance, you’re responsible for paying for self-employment taxes every quarter. For 2017 this is 15.3 percent of the first $127,200 of your income. The first year I was pretty bad about saving on the regular for my self-employment taxes. But after my first round, I made a concerted effort to squirrel away 40 percent of each paycheck toward taxes. The recommended amount can vary depending on where you look and who you talk to, but 40 percent is what works for me.
Medical Rainy Day Fund
This is something that I realized I needed after I had a minor eye injury a few months after taking the leap to full-time freelancing. The two trips to the ER, plus follow-up visits and medication tallied up to about $2,000. That, on top of not being able to work for a few weeks, would’ve taken a toll on my finances. It was not a pleasant experience, but having some savings prevented me from taking a major hit. You can also tap into your medical rainy day fund to pay for your monthly premiums and out-of-pocket medical bills.
Alternatively, you can open up a Health Savings Account (HSA) to pay for out-of-pocket medical expenses. An HSA helps you save on taxes, plus it can be a way for you to invest and save for retirement. Note HSAs have annual maximum contribution limits. In 2017 the most you can save is $3,400 if you’re an individual, and $6,750 per family.
A PTO Fund
Like all humans, you need to unplug and take a proper vacation. A paid time off (PTO) fund can help you with that. Yes, that includes freelancers, who tend to work long hours and weekends. As for how much you want to set ahead for your paid time off fund, it’s really up to you.
Besides major holidays, are there any days you’d like to take off? Perhaps your birthday? Or your significant other’s birthday? And let’s not forget setting time aside for vacation and sick time. If you have a family, that sick time could include caring for yourself and for others.
My PTO fund has enough for me to take six weeks out of the year off. Another thing you could do is divide your desired annual income by 11 instead of 12. That way you’ll figure out how much you want to earn each month so that you have a month’s worth of paid time off.
There you have it. What you need when it comes to budgeting for freelancers. While by no means comprehensive, having these types of savings accounts can help weather many storms you may have as a solopreneur.
Photo by Andrew Neel on Unsplash