One of the many new aspects you have to learn to manage when starting out as a freelancer is an income that fluctuates from month to month.
Working as a freelancer is a great way to not only increase the freedom you have in your professional life, but for many people actually leads them to earning more than they did as a full time employee.
However, freelancing is in no way a quick route to financial success, and only individuals who are able to budget effectively and plan ahead when it comes to their finances will be able to achieve the right balance of freedom and stability.
There are a lot of costs that you have to account for as a freelancer that you may not have given much thought to as a full time employee, including taxes, pensions, insurance and the overhead operating costs.
This 5 step guide should help you keep your fluctuating income under control.
Figure out your average monthly salary
If you’ve been earning your income as a freelancer for at least several months, you should be able to figure out a good indication of you average monthly earnings.
Take the data from as many months as you can, add up the amount you earned each month and divide by the number of months to get a rough idea of what you’re bringing in each month.
It’s best to calculate this average at least once a year with the previous year’s earnings, as it can also give you a good idea of how your income is changing (and hopefully growing!) overtime.
When you have this figure, you can begin to average out your earnings so that you can save in high income months and supplement low income months.
On a month where your earnings exceed your monthly average, it’s a good idea to transfer the excess straight to a savings account. On any months that you earn under your average you can use this saved money to supplement your income, bringing it up to your average.
Creating this stable monthly sum of money from your unstable income will allow you to better plan ahead and ensure that you are always able to meet your essential costs.
Calculate your Essential Costs
One of the first steps anyone should take when tidying up their finances is to build a clear picture of how much they need to spend each month to cover their essential costs.
Any costs that are necessary for your life come under your cost of living, which includes rent, utility bills, travel, food, clothes, medical costs etc.
You will also need to factor the costs of freelancing into your essential costs, you can think of these as your costs of working. This will include taxes, work subscriptions, equipment costs, insurance, pension payments and any other costs that are crucial to performing your job.
When you subtract both your cost of living and cost of working from your monthly average income you should be left with your disposable income.
Controlling your Disposable Income
The area where many people lose track of their finances is their disposable income, and this can often be because people are unrealistic about the amount they budget for leisure activities and treats.
Go through your past bank statements with a fine tooth comb to categorise how you generally spend your leisure money and try to identify any unexpected money pits.
It may be that you have direct debits set up for memberships you never use anymore, are overspending every day on lunches out or have a habit of online shopping in the evenings. These can be great areas to cut back and feed back into the leisure activities that will make a real difference to your quality of life.
The most important thing is to be upfront about what you can cut back on. Everyone needs to have time to unwind and enjoy their personal life, so if you love your Thursday evening cocktail with the girls or look forward to your Saturday afternoon trips to the pub all week, just budget them in!
It may not be that you need to cut back at all, just gain a better understanding of how much you need every month in order to maintain your lifestyle and stop your spending from creeping up over time.
If you find that your income does not cover your regular spending, even when you cut down, it may be that you are not charging the right amount for your services.
Don’t forget that freelancers get paid more than regular employees, because they do not have any of the benefits that a full time worker would. Your rates should reflect this.
Build your Emergency Fund
For freelancers, having a little stash of money tucked away that you can fall back on is essential. Without sickness cover and other safety nets in place, this money can make a huge difference for you and your family in times of need and give you peace of mind.
Building an emergency fund isn’t easy, but anyone can get started with stashing some money aside if they stick to a clear savings plan.
Diversify and expand your earning potential
The nature of freelance work does mean that you’ll have periods where you earn less, whether its seasonal, affected by external changes such as the economy, or just part of the natural ebb and flow of opportunities.
Having a range of income channels that you can turn to in your quieter months can be comforting and provide you with a little boost where you need it.
It could be that by learning a couple of new skills you can create new opportunities that are similar to what you do already. Maybe you have a hobby that you think you could monetise given the time, or maybe you’d be happy to consider a completely unrelated side gig, such as uber driving.
What advice would you give to someone struggling to manage their fluctuating salary? We’d love to hear some real life examples in the comments below!