Budgeting as a Freelancer or Gig Worker
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The gig economy is thriving, with many part-time and full-time workers delivering with DoorDash, performing graphic design tasks on Fiverr, or contracting with other companies for extra money. Whether you’re a freelancer as a side hustle or for the majority of your income, there are some pros and cons to working as an independent contractor.
What many freelancers and gig workers gain in autonomy and freedom from gig work, they lose when managing cash flow. Getting paid irregularly and managing self-employment tax are two of the most common challenges you’ll come across performing freelance work. Thankfully, with a strong budget and some financial discipline, these don’t need to be obstacles you can’t overcome.
From setting up a separate savings account so you can set aside money for income taxes to retirement planning as someone who is self-employed, here are some monthly budget financial tips to help you reach your financial goals while managing your side gig or small business.
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The challenges of freelancing
Many people talk about the freedom that comes from making extra money on the side as a freelancer — or working for yourself full-time as a small business owner. However, some challenges come with freelancing. Here are three of the most common personal finance issues you’ll face as a gig worker.
Irregular income
As a freelancer or gig worker, you’re generally paid via invoice and rarely paid on a regular schedule as you would if you were paid bi-weekly. For example, I freelance with several clients as a writer, and those invoices can be paid out anywhere between 15 and 60 days from invoicing.
Not having a set amount of work or a steady paycheck can mean that you often juggle expenses and income on varying timelines if you freelance full-time. This makes it even more important to have a strong financial foundation via your budget to manage your income successfully.
Tax liabilities
As an independent contractor, you don’t have tax payments set aside or taken from your pay each time you’re paid. This means that you need to make estimated tax payments on a quarterly schedule or save money in a separate account to be able to pay for your income tax when you’re filing your tax returns.
Generally speaking, a good rule of thumb is to save about 30% to cover self-employment taxes. These taxes cover both portions of your employer and employee taxes for Social Security and Medicare. You may also want to discuss your specific tax situation with a tax professional to be more certain about the right amount to save.
Lack of insurance and other perks
What you don’t get in flexibility working for a company, you generally receive in workplace perks and other benefits. Matching 401k contributions to your retirement accounts, health insurance, vision insurance, dental insurance, supplemental life insurance, and paid time off are all perks that you can get with a company that you may not be able to swing as an independent contractor without saving up months of expenses in advance.
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How to get started budgeting as a freelancer
Being on top of your income and expenses is the best way to manage some potential financial risks of freelancing. Here are a few tips to help you start budgeting as a freelancer.
Set goals
Having goals is important regardless of whether you’re a full-time salaried employee or independent contractor. This is because goals are the lens that helps focus your spending and saving. Some people care about their health and want to spend money on organic groceries or supplements so that they may save more in these categories of their budget. Other people are hoping to one day own a home or be able to retire early.
If you’re currently in debt, paying off that debt is a great goal. Not only will it free up your income towards the things that matter most to you, but it will also allow you to minimize how much of your take-home pay as a gig worker or freelancer is immediately off to a credit card or student loan servicer. Paying off debt is one of the quickest ways to give yourself a pay raise, as minimum payments and interest rates will no longer hold your income back.
Track and analyze your income and expenses
Once you’ve set goals, tracking your income and expenses for at least a month is a good idea. Once you’ve done this, you can see how much money you generally spend on certain aspects of your life, including rent, utilities, groceries, and eating out.
Many banks are starting to include tools that help break down your bank statement by how much money you spend in certain categories. This can be a great way to take stock of the past few months' expenses. It’s also a good idea to keep track of any business expenses that you might be able to write off at the end of the year.
Tracking your income is particularly important as a freelancer. Just because you had a good month last month doesn’t mean every month will be the same. Look at at least six months' worth of bank statements and average your income to get a good benchmark for what you can generally anticipate earning each month. This can serve as a helpful guideline as you begin budgeting and work to live below your means.
Set up a separate bank account for business
One of the most cumbersome tasks as a freelancer is discerning what expenses from the year are business-related write-offs and what were personal purchases. Rather than digging through your bank statements and Amazon.com order history each year, keep a separate bank account for business expenses.
If you need to make a purchase, transfer money from your personal checking account or savings account into that bank account. At the end of the year, it will be much easier to discern what was a business expense, as you’ll have all your write-offs in one place for easy access when you or your accountant file your taxes.
The benefits of budgeting apps
Budgeting apps can be a godsend when it comes to staying on top of how you visualize multiple income streams and expenses. Having one single repository of information that’s easier to quickly glance at than your bank account can be pivotal to staying on track financially. Whether you use YNAB or Empower is up to you — the important thing is important to find a budgeting app that works for you and stick to it.
Personally, I’ve found using YNAB (You Need A Budget) particularly helpful for budgeting my freelance income. This allows you to partition your income into different categories (or buckets) while simultaneously rolling with the punches if an unexpected expense pops up.
If you have a month where you earn more than you expected, you can easily budget money into future months, which allows you to break the paycheck-to-paycheck cycle. Beyond that, YNAB forces you only to budget the money you have, so you’ll only ever be working with money you have in your bank account that’s already been paid by a client.
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Must-have categories in a freelancer’s budget
When you’re setting up your budget, there are going to be some categories that you have in your budget that others wouldn’t have. Generally, these are more long-term focused savings categories that ensure you stay on track since your employer won’t be saving these things for you.
Income taxes
As has already been mentioned, having money aside for your taxes is important. One way to do this is to have a category in your budget specifically focused on saving for your quarterly estimated tax payments. Every time you get paid by any of your clients, you can take 30% of that income and place it in that budget category or a separate savings account.
Once you’ve set aside the amount you need for your income taxes, you can budget for the rest of your monthly wants and needs. Setting aside money for your income taxes ensures that you never get stuck in a bind where you need to pull from your rent or utilities to stay square with the Internal Revenue Service.
Retirement and long-term goals
Just because you don’t have an employer-sponsored 401k doesn’t mean that you can’t be . As an independent contractor running a sole proprietorship, you can set up either a Roth IRA or a SEP IRA. Here’s what you should know about both of these retirement options.
Simplified Employee Pension (SEP)
A SEP is quite like a 401(k) account for self-employed independent contractors. It lets you contribute pre-tax dollars towards retirement.
Roth IRA
When you contribute to a Roth IRA, your contributions are made with dollars after taxes are taken out. While this may reduce the amount you can contribute vs pre-tax contributions, it also means that you don’t pay taxes on anything you withdraw because you have already paid your taxes “up front.”
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A strong emergency fund
When your income has the potential to fluctuate as much as it can as a freelancer, your emergency fund is even more important. In a world where you may lose a client at the drop of a hat, having extra money saved up to cover your monthly expenses can be critical.
Typically, conventional wisdom is that you save at least a month’s worth of expenses in your emergency fund. As a freelancer, you may want that to be the equivalent of several months of expenses, just to be on the safe side. Finding savings accounts or checking accounts with competitive interest rates can also be helpful as you’re looking to maximize your savings and emergency fund. Earning a few bucks a year isn’t much, but it also isn’t something to sneeze at, either. As a freelancer, every extra dollar you can add to your checking account is an important buffer.
Tips for freelance budgeting
Whether you’re looking to maximize your income or minimize expenses, there are a few things that freelancers can focus on to put their best foot forward, financially speaking. The following list of tips for freelance budgeting is by no means exhaustive but should help put you in the right frame of reference for getting your budget in order as a gig worker.
Minimize business expenses
Many independent contractors or sole proprietors talk about writing business expenses off as if it’s a get-out-of-jail-free card. While it’s true that writing off certain business expenses can help you minimize your overall tax burden, the end result isn’t always a one-for-one reduction in cost.
It’s important to be smart about your expenses as a freelancer. Remember that budgeting for purchases in the present affects your available income in the short term.
Work with a tax professional
If you have a variety of freelance clients or different sources of income from different types of businesses, it may behoove you to work with a tax professional. While an accountant or tax preparer will charge you for their expertise, they may also be able to help you find expenses to write off or even advise you on tax-saving business strategies in the future. Just because you missed a tax credit this year doesn’t mean you won’t qualify for it next year!
Negotiate rates with clients
Many times, people focus on reducing their expenses when they’re budgeting. While this is only natural, there are some financial scenarios where it makes more sense to boost your income rather than minimize your expenses any further. This is where being a freelancer can actually come with its perks.
At a typical salaried job, you may only have the opportunity to ask for a raise or promotion once or twice yearly. However, when working with freelance clients, you may get the chance to negotiate your rates a bit more often. Especially if you haven’t raised your rates in a bit, broaching the topic with your clients may be a simple way to ensure you earn more money on future work.
Network
It can be a bit isolating to work from home, even with all of the freedom it comes with. Networking is a great way to meet other freelancers or gig workers and learn from their experience. Searching Facebook for gig work groups allows you to network with other independent contractors like you and share tips and tricks specific to your niche.
From inspirational stories to mistakes you’ll want to avoid, networking can provide you with both camaraderies as well as valuable insight into how to maximize your earning potential best.
Become financially literate
Becoming financially literate is the best offense and defense you can have in personal finance. You don’t have to understand everything to the degree that your tax professional would, but holding a solid conversation and asking important questions with someone in the financial services sector can be huge.
You can’t advocate for yourself financially if you don’t have at least a basic understanding of the financial products you’re considering. From life insurance to health insurance and investment products, becoming financially literate ensures that you’re only spending your hard-earned money on the things that make sense for you and your financial goals.
The nice thing about becoming financially literate is that there are myriad ways to do it. Whether you like to read books, watch YouTube videos, listen to podcasts, or read articles on JoyWallet, there are various ways to become more seasoned in the world of personal finance.
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The bottom line
As you can see, the financial impact of starting a family can be quite significant. What’s more, the child tax credit for qualifying dependents in the United States in 2023 is only $3,733, which barely covers the cost of two or three months of daycare in most states. If you are planning on expanding your family, you’ll really need to dial in your family finances to make sure that you don’t overextend yourself.
In addition to increased health care costs and everyday necessities, it’s also important to think about the type of life you want to provide for your child. You may never have been interested in going to Disney World, but if your kid wants to go to the happiest (and most expensive) place on earth, will you feel obligated to do so? From vacations to extracurriculars and college, it’s important that you and your partner are on the same page about what is philosophically important and financially possible for you to provide for your child as parents.
Looking at this brief overview of costs associated with starting a family, it can be easy to get discouraged about having a kid. While the current economy certainly contributes to some anxieties around starting a family, it’s hard to put a price on parenthood. If you talk to most parents, they’ll say that raising a child is one of the most rewarding things they’ve ever done. For those reasons, it may be worth figuring out how to make starting a family make financial sense.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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