SAVING AND BUGETING FOR FREELANCERS
CH 1. Create a Budget Based on Your Average Income
CH 2. Create a Budget Based on Your Average Income
Why It’s Important: Freelancers typically experience fluctuations in their monthly income due to the nature of contract work, project-based assignments, or varying client demand. Unlike a salaried employee with a predictable paycheck, freelancers may have months of high income followed by periods of lower earnings. This variability makes it challenging to manage finances, as you can’t always count on a consistent amount of money coming in each month.
Irregular income means there may be months when work is slow, making it essential to have an emergency fund to cover living expenses during these times. How to Implement: Aim to save 3-6 months’ worth of living expenses. Start by setting aside a small percentage of each payment you receive until you reach your target.
Creating a budget based on your average income helps to smooth out these fluctuations, providing a more stable financial framework. By budgeting according to what you typically earn over time, rather than what you make in a particularly good or bad month, you can avoid overspending during high-earning periods and under-saving during leaner times. This approach ensures that your essential expenses are covered, and it prevents the stress that comes from sudden income drops.
How to Implement:
Track Your Income Over Time
Start by tracking your income for at least 6-12 months. This period is long enough to account for seasonal variations and other factors that might influence your earnings.
Use a spreadsheet or budgeting app to record every payment you receive, noting the date, amount, and source of income. Tools like QuickBooks Self-Employed or Wave can automate this process.
Calculate Your Average Monthly Income
Add up all your earnings over the selected period (e.g., 12 months).
Divide the total by the number of months to find your average monthly income. This figure represents what you can reasonably expect to earn on a regular basis.
Example: If you earned $60,000 over 12 months, your average monthly income would be $5,000 ($60,000 ÷ 12).
Create Your Budget
Base your budget on the average monthly income. List all your fixed expenses (e.g., rent, utilities, insurance) and variable expenses (e.g., groceries, entertainment).
Ensure that your total expenses do not exceed your calculated average income. If they do, you’ll need to reduce discretionary spending or find ways to increase your income.
Treat Extra Income as a Bonus
On months when your income exceeds the average, avoid the temptation to increase spending. Instead, treat the surplus as a bonus.
Allocate this extra income towards savings, debt repayment, or investments. This will help build your financial cushion and prepare for months when income is below average.
Example: If your average monthly income is $5,000 but you earn $6,000 in a given month, consider saving or investing the extra $1,000 rather than spending it.
Reassess Regularly
Revisit your income average and budget every 3-6 months, or whenever there’s a significant change in your earnings pattern.
Adjust your budget to reflect any consistent increases or decreases in income to ensure it remains realistic and effective.
Budgeting based on average income allows freelancers to manage their finances more effectively, reducing the risk of financial shortfalls during slower periods. It helps create a sense of stability, even in an unpredictable income environment, by encouraging disciplined spending and proactive saving. This approach is crucial for maintaining financial health as a freelancer, where the highs and lows of income can otherwise lead to financial stress.
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