How to Make a Budget If You Want to Freelance Full Time

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The gig economy’s roots began at the start of the 20th century when jazz musicians began referring to performances as gigs. In the mid-century, temporary agencies began to rise in popularity. By the turn of the century, we found ourselves living in the web-connected, digital world with gig and freelance work becoming more accessible and easier to find. Finally, out of the ashes of the Great Recession, the gig economy as we know it today was born. 

The size of the freelancer workforce has stayed relatively constant at about 57 million, but what’s changed is that more freelancers are doing it full time — an increase of 11 percentage points from 2014 to 2019, according to the most recent annual survey of freelance workers. It’s reasonable to think the pandemic has pushed more workers to make their side hustle a main hustle. So how are those looking to make the jump supposed to manage the inconsistent and unpredictable income that’s inherent to freelance work?

The best way to manage financial inconsistency and unpredictability is to create a strategy. Your strategy should be informed by your personal economics, pricing and your runway, which is the amount of time you have until you run out of money. Think of it as a buffer to get you through natural income fluctuations. By looking closely at these factors, you can reverse-engineer a sustainable freelance practice. 

Start with a realistic personal budget. What are all your monthly personal expenses? Figure out what you spend on housing, regular life expenses and any personal debt payments. Don’t forget to add in variable costs, nonessentials, fun spending, personal savings and investments. The total is what you’ll plan to pay yourself from your freelance business each month. For example, let’s say your monthly total is $4,500. Plan to add about 30% to it for taxes, as a general rule of thumb. When you earn income as a freelancer, you’re responsible for paying taxes on your income. While traditional employees have part of their income withheld from their regular paychecks for taxes, freelancers who earn income are often required to pay estimated taxes on a quarterly schedule

Add in monthly freelance business expenses. Now that you know your personal monthly nut (how much you need to earn each month to cover expenses), add any monthly business expenses — for example, the monthly cost for your website, branded email and scheduling software. Don’t forget about expenses that you might pay for on an annual basis, like your accountant’s yearly tax filing service fee or an umbrella insurance policy. You should also plan to set aside some extra money every month to tap when you’re not pulling in as much. This grand total is your freelance business’s monthly income goal.

Look at pricing through the lens of your monthly income goal. With your monthly income goal, how can that translate to pricing your service or product? If you charge an hourly rate for your services, how many hours do you need to bill each month to reach your monthly income goal? If you charge a flat rate, how many projects do you need to be actively working on in any given month? Looking at your pricing from this perspective can be a frustrating and illuminating exercise. Some freelancers doing this exercise may realize they need to raise their rates because their current pricing forces them to work 16-hour days. 

Separate your business and personal finances. Run your freelance business like a business. Open a separate checking account for your business, and individual savings account for tax savings. Even if you don’t have a formal entity, like an LLC or S-corp (yet), you can still use a separate checking account. It won’t technically be a “business” checking account, but keep things separate — deposit business income into this account. Pay for business expenses from this account and pay yourself from this account. 

Know your runway. If you stop working today, how much do you have in the bank, and how many days or months does this cover? When you have a sufficient runway, the fear that comes with unpredictable income is less scary. Having a runway means you can afford your business expenses, pay yourself each month, and continue to choose the kind of freelance work you want to do. Although not everyone starts off freelancing with the advantage of a runway, every freelancer should work toward one.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paco de Leon is the founder of the Hell Yeah Group, an online bookkeeping service for freelancers, entrepreneurs and small-business owners.

©2021 Bloomberg L.P.

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