The working world seems to be separated into two groups: the employed and the self-employed. For those of us who are newly self-employed, the biggest question is probably how to budget for an unreliable income. When you're employed, it's effortless: you receive X amount of dollars per month, and that's what you use to build your budget on.

However, as a freelancer you will have fat years and lean years. You will hit both the highs and slumps in income, so you need to ensure you aren't caught off guard when they roll around. (Learn the pros and cons before you bid adieu to sales meetings and power suits forever. For more, see Be Your Own Boss By Freelancing.)

In Pictures: Debunking 10 Budget Myths

Work Backwards to Create a Budget
Since you can't rely on your income, you have to control your expenses and save the rest for the months you won't have any work. So instead of relying on a set amount of income each month and creating a budget from that, you have to look at your expenses first to create a budget.

Write down every essential expense: rent, utilities, laundry, internet, phone, food, medical, gas and car-related expenses (parking, car registration, etc.). Then, designate another reasonable amount as a buffer ($200 for example). Try the budget out for a couple of months to make sure it is doable, and adjust accordingly.

Keep a larger-than-normal emergency fund so that you won't dip into your other monetary sources such as retirement funds or lines of credit. The recession has made it clear that anything less than a year or two years saved is much too little for a freelancer.

Keep Your Books Clean And Organized

It is very important to be financially organized. If you want to do your taxes by yourself, keep an easy-access spreadsheet of all your expenses, and use accounting software that can create fiscal year and tax statements with a click of a button.

Even if you decide to hire a professional, keep a spreadsheet of all your expenses because electronic records are better than paper records. Plus, you can just email the spreadsheet, and it'll be much easier for them to file your returns.

Filing Folder Method: Use 12-tab folders labeled monthly. Have a travel expense? Record it, then toss it into the month you incurred the expense.

Envelope Method: Use envelopes labeled for each category. Have a meal expense? Record it, then throw the receipt into the "Meals & Entertainment" envelope for the fiscal year.

Don't Forget To Save For Taxes

Being a freelancer also means you don't have your taxes automatically deducted from your paycheck, so you need to save the government's cut on the side.

This tends to trip up a lot of freelancers, because it's hard to get out of the mindset of seeing what is in your business bank account as being freely available to spend. For each project you take on, estimate the taxes you will have to pay (20% is a good rule of thumb), and mentally ignore what is not rightfully yours. (Running your own business has both personal and financial perks. To learn more, check out 10 Tax Benefits For The Self-Employed.)

In Pictures: 8 Tips For Starting Your Own Business

Keep A Healthy Cash Flow Buffer
A larger-than-usual cash flow buffer is a must-have for freelancers, because many tend to drain the business bank account without realizing the consequences. Withdraw only what you need, because you never know when you will need the money in a pinch.

You will require money buffers to avoid paying bank charges, to cover the tax amount required for each quarter or at the end of the year, and for incidental expenses or upfront payments without reimbursement.

Business cash flow buffers can vary depending on what industry you are in. If you have employees, or need to buy or hold inventory, figure out how much you need each month, and keep an appropriate amount of cash flow (two months worth, for example) as your buffer.

The Bottom Line
Every financial snag you will run into is an opportunity to learn, and budgeting for an irregular income is no exception. It just takes practice, discipline and good organizational skills. After the first year or two, it will become like second nature.

(To dig deeper into this topic, see Freelance Careers: Look Before You Leap.)

Related Articles
  1. Retirement

    Don’t Retire Early, Change Careers Instead

    Though dreamed of by many, for most, early retirement is not a viable option. Instead, consider a midlife career change.
  2. Retirement

    Read This Before You Retire in the Philippines

    The Philippines has a warm climate, a low cost of living and plenty of people who speak English. What to do next if you think you want to retire there.
  3. Retirement

    4 Books Every Retiree Should Read

    Learn more about the current financial situations retirees are facing and discover four books that every prospective and current retiree must read.
  4. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  5. Retirement

    Retirement Plan Solutions For 70+ Workers

    If you’re still working in your 70s, you’re probably trying to seal a crack in your nest egg, or you just don’t want to retire.
  6. Retirement

    How to Fix an Error on Your Social Security Check

    For many seniors, social security benefits checks are their income stream which means the benefit has to be correct. If you spot an error, you can fix it.
  7. Retirement

    Why The 4% Rule No Longer Works For Retirees

    The 4% rule basically states that retirees can withdraw that much from their portfolio each year without depleting the principal too early.
  8. Retirement

    Top Signs You Aren’t Ready to Retire Yet

    Think you are prepared to retire? These warning signs may indicate otherwise.
  9. Savings

    These 10 Habits Will Help You Reach Financial Freedom

    Learn 10 key habits for achieving financial freedom, including smart budgeting, staying abreast of new tax deductions and the importance of proper maintenance.
  10. Retirement

    Empty Nesters: How to Profit When the Kids Leave

    Finally...your intensive parenting days are over and your budget is a little more flush. It’s time to focus on where that extra money goes.
  1. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  2. How are spousal benefits calculated for Social Security?

    The amount of your Social Security spousal benefit depends on a number of factors, including your age, the maximum amount ... Read Full Answer >>
  3. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  4. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  5. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
  6. How do I know how much of my income should be discretionary?

    While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>

You May Also Like

Trading Center