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Working as a freelancer has its own merits and demerits. One of the significant issues in the life of a freelancer or a self-employed professional is budgeting. With this blog post, we will serve you a vital guide on how to budget as a freelancer.
The blog will cover essential pointers to remember as a freelancer, along with a sorted conclusion. So, let’s begin with some basic budgeting details.
Importance of Budgeting as a Freelancer
Budgeting helps to achieve a structured approach for managing income or finance. It helps ensure the financial stability for freelancers as well as businesses. Therefore, a freelance budget is essential to plan and execute. Here are some essential reasons for the importance of freelance budgeting.
1. Variable Income
Freelancers do not enjoy a stable income like the salaried ones. Hence, it is crucial to keep an eye on their finances for managing the feast-and famine-period of their freelancing business. A freelance budget will help you manage your variable income with the best financial planning to survive the famine.
2. Expense Management
Whether we talk about business expenses or personal expenses, both stand crucial in the life of a freelancer. Freelance budgeting helps manage personal and business expenses like a PRO. Experienced freelancers, therefore, invest in expense management software that helps record, track, and manage personal and business expenses with ease.
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3. Tax Planning & Management
Another essential element of freelance budgeting is planning and managing taxes. Salaried people do not have to manage taxes independently, as their organization manages their tax planning. Still, as a freelancer, the complete tax planning and management solely depend on you. Effective budget planning will help your freelance business with accurate tax compliance.
4. Buffer Fund
Proper budget planning will help freelancers like you to focus on the buffer or the emergency fund management to survive the worst business period. Because freelancers have variable incomes, having an emergency or buffer fund for uncertain events becomes crucial. Effective budget planning will help freelancers to manage their emergency fund making things easy for the future.
5. Retirement Planning
There are no employer-sponsored retirement, provident funds, or pension schemes for freelancers. Hence, freelancers have to take care of their retirement planning by themselves. Freelance budgeting helps to focus on emergency funds and investments, thereby assisting in retirement planning.
Now, let’s focus on how to perform budgeting for freelancers.
How to Budget as a Freelancer?
Budgeting is an essential need for freelancers. A freelancer must go for exclusive budgeting to survive efficiently in the competitive market. Well, freelance budgeting is basically carried out by calculating the monthly income and deducting the expenses, future savings, and taxation planning. But we are here with a detailed guide on budgeting as a freelancer. So, let’s begin!
1. Calculate Your Average Monthly Income
Money that comes in is your income. A freelancer works on different projects or with different clients, for which the income is variable every month. Hence, it is important to calculate the minimum or average monthly income for accurate freelance budgeting.
Budgeting is easy to determine when you have a fixed monthly income, exactly in the case of a salaried person. But when you work as a freelancer, it is essential to get an exact average value of your income for budgeting as a freelancer.
How to Calculate Your Average Monthly Income?
Counting your average monthly income as a freelancer is very easy and simple. Add up all your twelve months’ income and divide it by 12. The answer is your average monthly income as a freelancer. If you haven’t worked for 12 months, then you divide your income by 6 (6 months average).
2. Decide On Your Fixed and Variable Expenses
While our average income value is on hand, it is time to calculate the monthly expenses by listing the fixed and variable expenses. Once your expenses are listed, it is time to determine which are compulsory. The rest of the expenses can be avoided to accumulate the buffer fund.
What are Fixed and Variable Expenses?
Fixed expenses are the type of personal expenses that cannot be avoided. It includes rent, mortgage, insurance premiums, car payments, loan installments, and more.
The variable expenses include the type of expenses that can be reduced or avoided with proper freelance budgeting ideas. It includes food, grocery, and other utility bills, travel expenses, repair costs, marketing expenses, and more.
Again, just like the monthly income, having an average figure for the monthly expenses is important. Deducting the expenses from the income will give the amount that can be managed or utilized for taxation planning and emergency funds or savings.
3. Cut Out What You Don’t Need
After successfully listing your expenses, it is crucial to list the essential and less critical expenses per their level of need in your daily life. For example, utility expenses can not be avoided, but luxury expenses can be easily avoided. So, the next step to budgeting as a freelancer is to cut out what you don’t need.
A freelancer can cut the cost of buying new equipment or devices unless required urgently to save more for the upcoming months.
4. Plan for Taxes
Full-time job employees don’t have to worry about managing their taxes as the organization does it on their behalf, but when we are talking about how to budget as a freelancer, it is crucial to figure out or plan for taxes.
Freelancers must prepare their taxes independently if they earn 400 USD/Month or more.
It is excellent to use freelance invoicing software to determine how much of your exact income you have on hand for planning the taxes. Freelancer tools such as invoicing software help easily track taxes, expenses, and incoming cash flow.
5. Know Your Backup Plan
A backup plan is a must while you are planning your freelance budgeting. Preparing yourself for an extra or emergency income is best by showcasing your portfolios or gigs on Fiverr, Uplers, or Upwork. Also, you can cut down on unnecessary expenses or unimportant financial investments to have a more substantial backup plan for your freelance budgeting.
6. Plan, Review, Plan Again
Last but not least, while you have followed all these tips for efficient freelance budgeting, it is time to review your plan and recheck if you have missed any critical information to add. And if your freelance budget needs a redo, plan again.
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While running errands, calculating your average monthly income is essential to justify your ongoing expenses and taxation planning. More money or income needs to be calculated or planned to manage your future retirement savings easily. Having freelancer tools or a business suite will ease your freelance business management. How about getting freelance invoicing software that offers 66+ freelance invoice template designs with free expense tracking and recording, all under a single roof?
Still have questions, here are some of the most frequently asked queries that will help you solve your doubts with ease.