If you are a freelancer like I am, putting together a budget can be challenging. You do not always know how much money you will make every month, but you still need to have a game plan. Here are a few pointers to get you started:
Know Your Expenses and Your Target Monthly Income
With a full-time job, you know how much money you will be getting on every paycheck, so it is easier to lay out a budget. It gets more complicated with freelancing, so you need to take the time to figure out your cost of living. How much money do you need to make to cover rent, utilities, food, debt payments, and all your other living expenses each month? Once you have figured that out, decide what kind of monthly income you will need. Remember that you need to factor in taxes, as an employer does not take it out of your check. When you are setting your target income, remember to add in a little extra breathing room for entertainment, savings, or maybe some bills that end up higher than anticipated.
Have an Emergency Savings Fund
It is important for anyone to have an emergency savings fund of 3-6 months worth of income, but it is especially true for freelancers. You may have a particularly lean month, or it may take a while for a particular paycheck to get to you. Perhaps you might have an unexpected medical expense or need to buy a new car. In any case, you need to be prepared because you will not have a regular income to rely on.
Save for Retirement
Saving for retirement is easy when you work for an employer because you can have it taken directly out of your paycheck, and you will often get an employer match it. Nevertheless, saving for retirement is still a good goal as a freelancer because the more you can save when you are younger, the better off you will be in retirement. Consider opening an Individual Retirement Account (IRA)—either a traditional IRA or a Roth IRA. For both, you can put up to $5,500 in per year or $6,500 if you are older than 50 ½. With a traditional IRA, the money is not taxed until you take it out. It also allows you to lower your Adjusted Gross Income (AGI) on your 1040, meaning you will pay less in taxes. A Roth IRA does not lower your AGI, but the money is not taxed when you take it out.
While it may seem overwhelming to budget when your income sources are irregular, you can still do it. By making sure you know how much you will need to cover your monthly expenses, having an emergency savings fund, and contributing to a retirement fund you will be able to focus more of your time on gaining new clients and less of it worrying about bills.
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