Budgeting for freelancers - Give Me Back My Five Bucks

Budgeting for freelancers

I was thinking the other day about a recent post I wrote about how I became a freelancer. I talked about the anxiety I felt not having a steady stream of income, but I didn’t talk about what I did to remedy the situation.

Last year I created monthly budgets like I normally do, but with irregular payments coming in (and no full-time salary to anchor my income), it ended up being a somewhat frustrating experience. I didn’t have enough cash flow to bridge the gap between payments, so sometimes I was caught a little short on cash. :| It would have been relatively easy to dip into my (non-EF) savings account, but with PC Financial, taking money out of a savings account takes one business day. Besides, I had to figure out a better way.

Related: When does a freelancing career take over?

After the first few months, I realized I needed a better system that accounted for income fluctuation. The first step was to project my monthly income, and there are generally two methods to doing that:

  1. Average monthly income. Add up your monthly income from the past year, divide by 12.
  2. Minimum monthly income. Take the lowest earning month you have had in the past year.

When I was working a full-time job and freelancing, I based my budget on my minimum monthly income – which usually ignored any freelance income I earned. That way, I was sure I was satisfying my budget, without having to look at fluctuating secondary streams of income to compensate my spending.

However, as a freelancer, I didn’t have anchor income (or even many anchor clients) that would provide me a steady stream of money I could rely on. So I decided to change my approach and work my budget around my average monthly income instead. Then, I would pay myself a bi-weekly salary, as if I was still working for someone else – instead of just randomly spending/saving the money as it came in. So I went back and added up my freelance income from the past 12 months, and divided by 12 to get my average monthly salary.

That made me feel really good. I knew approximately how much I would bring in each month, and I felt secure that I could meet all of my financial obligations, and still have enough left over for the fun stuff – like travel. :) But my only problem was, if I was already starting short on cash flow, how would I build up a salary base so that I could start giving myself a bi-weekly salary?

It was then I realized why I’m always so overly cautious when it comes to my money – for exact reasons like this. I had about $5,000 set aside in a savings account (my $10,000 Emergency Fund is separate from this). I took out enough to pay me a bi-weekly salary to start, and started to used that savings account as my business account.

Related: Time management for the freelancer

This was a good short-term solution, but if I were going to make freelancing a full-time career, I would have done a lot of things differently:

  • Set up a separate business chequing/savings account. I should have done it before I left, but it just wasn’t a priority (even though it should have been).
  • Stay more on top of admin work. I’m still guilty of this. I have a really hard time replying to e-mails (especially advertisers/sponsors) in a timely manner – because all I want to do is write, write, write! But when I’m my own business, no e-mail can go unanswered.
  • I would have cared more about making money from my blog. Monetization has never been a big thing for me. A lot of bloggers make a killing with sponsors and banner ads and affiliate marketing. Sure, the money would be nice. But it’s just not something I care enough about. I’d rather cultivate personal relationships with companies. That’s why I focused on my partnership with HostelBookers, and a few other smaller companies last year.
  • I would have worked harder. Okay, well maybe. Last year I worked about 25 hours/week and earned about $57k. That’s a pretty decent salary, but if I were going to make freelancing my career, I would have gone at it harder. Pursued more opportunities. Said yes to all media interviews (I said no. Often.) Worked a full 40-50 hour/week. Of course, that was impossible to do while I was traveling so much… and that’s a choice I made.
  • Saved up for a business emergency fund. The only thing that was keeping me calm was my $10,000 personal Emergency Fund. I should have had a savings account set up for my business – so that if I lost a big client (I did while I was away), I could supplement my bi-weekly income until I found a replacement income stream. Thankfully I had additional savings outside of my EF that I could use if needed.

Anyway, that’s how I dealt with money during my year as a freelancer. Like I mentioned in last month’s post, freelancing gave me so much anxiety. But, I think that if I had created a better game plan (aside from: yep, I make enough money to quit my full-time job!), I would have been more successful at being less stressed out about finances last year. :)

Freelancers – do you have any budgeting tips to share?

About Krystal Yee

I'm a writer, personal finance blogger, and marketing professional based in Vancouver. I'm a former Toronto Star (Moneyville) columnist, author of The Beginner's Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I'm not working, you can usually find me running, playing field hockey, or plotting my next adventure.

6 comments

  1. I also wish to take freelancing as my career and this advice will really take me far. At least you have taken it further by advising us on how i should manage time.

  2. Love this! I’m making the switch soon and leaving my stable income still scares me.

  3. I like how you made choices that you know you can still go back and change now. Like you can still do interviews and work more. Networking has been the key for me. I made the switch and actually made sure to save up money before I did. I know the minimum I need monthly and already have that for a year. Freelancing is difficult but with hardwork and set schedule its easier that most people make it.

  4. I make most of my money by reviewing Amazon products on my blog but I also get some money through Adsense and other advertising networks. Most companies will pay me two months after I do the work. For example, the money I made from Amazon in July will get paid to me at the end of September. I never know exactly when a company will pay me but it is always towards the end of the month and I always know exactly how much I will be paid. I budget a month ahead. The money I’m getting in the next two weeks will be used for August bills. The money I get paid at the end of August will be used for September bills and so forth. It’s working pretty good so far but some months I don’t make as much and have to dip into my Emergency Fund to pay all my bills. In September, I’m planning on starting a LLC and opening a business account. I will probably start paying myself a salary just so I will have some stability and I won’t have to dip into my EF for bills. I would also like to have an emergency fund just for my business and I would like to pay business expenses such as hosting and domain renewal with the business money and not my own personal money.

  5. Thanks for sharing this. I am nowhere near being able to do work as a freelancer, but this will definitely help if and when that time ever comes.

Leave a Reply