In this post, we’re going to talk about why it’s crucial to have a budget and then discuss some strategies and tips for building a freelance budget.
Money anxiety can be a huge issue for freelancers. Unless you have a big roster of clients and a waitlist out the door, it’s common to feel stressed about the feast-or-famine nature of this type of work.
When you dig a bit deeper, though, the stress doesn’t necessarily come from the unpredictability or instability from generating revenue. It comes from feeling like you have no control over things, that you have to sit and wait for enough work to come in to pay your expenses.
You can alleviate some of that stress by creating a budget for your freelance business. Budgeting not only allows you to minimize your business costs, it’ll also help you get a better handle on your business in general.
Let’s get into it (jump to content in this article if you need):
Why Budgeting Is Important When You Freelance
A budget is a money management plan based around anticipated income and expenses. By putting a maximum cap on your expenses and a minimum threshold on your revenue, you’ll be able to keep your business profitable from month to month.
Other Reasons to Budget as a Freelancer
One of the biggest reasons is to determine if you’re charging enough for your services.
For instance, let’s say your expenses are as low as they can go. However, you’re barely able to break even at the end of the month with what you’ve earned. You don’t have many more hours left in the day to take on more work either.
If productivity isn’t an issue, then you should take a look at your budget. If everything checks out, then the problem is likely that you’re not charging enough to build websites. You might need to raise your rates, find better clients, or change your niche.
Another big reason to maintain a budget is for future planning. This goes for short-term planning like vacations as well as long-term planning like retirement.
A budget’s primary purpose is to help you get a handle on your finances now. However, if you can widen your profit margins substantially, you’ll have enough extra money to put away for that time off you have planned, for the house you want to buy, or for that two-year road trip you want to take when you retire.
How to Create a Budget
It’s important that you make enough to cover your bills, pay your taxes, put money away for savings, and fund the lifestyle you want. Here’s how to create a budget that will allow you to do this:
1. Monitor Your Earnings
You need to treat your income the same way someone who is employed would when budgeting. That means coming up with a monthly income you can use to create your budget.
You can still do this even if your earnings change from month to month or season to season. The point in monitoring your income over a set timeframe is to come up with an average.
Aim to gather at least six month’s worth of revenue data. Then calculate the average revenue for those months.
It would be helpful to create a spreadsheet that tracks these earnings for you. Place this earnings info into a “Revenue” sheet. Input the data manually at the end of each month and review your month-to-month average to see if anything has changed for the better or worse.
Keeping close tabs on this data will let you know if you need to take on extra work in the coming months to keep your business profitable.
2. Track Your Expenses
Freelancers have fixed expenses as well as variable expenses to pay each month.
Fixed costs include business expenses like:
- Rent or mortgage
- Cowork space fee
- Health insurance
- Liability insurance
- Business licenses
- Web hosting and domain
You’ll probably pay most of these costs on a monthly basis. Others, however, may be fixed fees that you owe annually or at different intervals throughout the year.
When factoring the latter type of fees into your budget, add up the total annual cost and then determine the monthly average. This will become the “monthly” cost for each expense.
As a freelancer, there are also variable costs to consider like:
- Electricity and other utilities
- Marketing and advertising
- Computers and equipment
- Supplies like printer ink, pens, and notepads
Other variable costs may arise as well. Like professional conferences, online courses, and travel-related expenses.
The fixed and variable costs that are a necessary and regular part of running your business should be added to a new “Expenses” tab in your spreadsheet. Even if the cost changes based on usage, you can figure out the average monthly the same way you did for your income.
Your total monthly expenses will become the maximum limit. If additional expenses come up, use this spreadsheet to determine if you have enough breathing room in your budget to pay for them now. Alternatively, this data will let you know if you should take on extra work in order to cover your costs.
3. Calculate Your Profit
Add a new tab into the spreadsheet for “Profit”. To calculate your profit, subtract your average expenses from your average earnings. This will tell you how much money you have to pay for personal expenses like:
- Rent or mortgage
- Medical bills
- Credit cards or loans
This money also goes towards your savings.
While a business budget is primarily concerned with covering your professional expenses, you should also have a big enough profit that you’re able to cover your personal expenses. So taking some time to calculate what those are and comparing them against your average anticipated profit in this step is important.
If you’re not able to cover all your expenses with what you earn, then adjustments will be needed — either by lowering your expenses further or by finding a way to make more money.
4. Set Your Business Budget
The last step is to create your budget. This is where you’ll determine how much you’re allowed to spend each month on your business (as well as personally).
You’ve already figured out what your maximum professional expenses are as well as what you’re spending on your personal life. Now it’s time to carve up your profit and divide it up.
The most common method that people use when budgeting is a 50/30/20 split. It goes like this:
- 50% of your earnings cover your needs.
- 30% cover your wants.
- 20% gets invested in savings or is used to pay off debt.
You might not be able to get a perfect split like this. It will change over time, too. For instance, if you take out a loan to go to school or buy a car, then you might want to allocate a bit more towards your debt.
This is the benefit of maintaining a budget though. By having a good handle on how much money is coming in and how much is going out, you’ll be able to play with the numbers to suit you.
Budgeting doesn’t just give you extra money to use in your personal life either.
Let’s say you decide it’s time to hire an assistant to handle all the pesky tasks that distract you from design work. You can use your budget to figure out if you have the money now to pay for someone. And, if not, it’ll help you figure out what to do to make it happen — either by raising your rates, taking on more clients, or getting rid of unnecessary expenses.
Final Tips for Budgeting As a Freelancer
When you’re first starting with a budget, the goal is to figure out the minimum amount of revenue needed to cover your expenses and to leave you with a profit. Once you get the basics nailed down, a budget can help you do so much more.
Here are some additional tips for budgeting:
- When creating your spreadsheet, keep notes on which expenses are tax deductible and what percentage (if not the whole thing) can be deducted.
- Separate your personal and professional expenses into different accounts for easier tracking.
- For expenses split between the two, use accounting software (like QuickBooks Self-Employed or Xero) that makes it easy to allocate a percentage of expenses to your business.
- Find accounting software that syncs with your tax software (like TurboTax or H&R Block) so you don’t have to input all your deductible expenses by hand.
- Use a budgeting app like Mint or NerdWallet to set spending limits and monitor any under- or overspending you do in each category every month.
- Set up various savings accounts — one for short-term savings, one for retirement, and one for rainy-day emergencies.
- Set up your bank or payment software to automatically transfer a certain percentage of your profits to your different accounts each month.
- Add a cushion to your budget. For instance, you might allocate $500 as a “just in case” expense so that you’re not forced to overspend. If you don’t spend it, store it away in savings or use it to buy something you really want.
The last point to make here is that a budget isn’t a one-and-done thing. While you might be able to set it up in a day, you should spend time looking it over and making adjustments every month. The more time you spend managing your finances, the better equipped you’ll be to make confident decisions that benefit your business — like taking on a new client or raising your rates in the new year.
Raise Your Web Design Freelance Game
Take a look at our other articles on Freelancing and running a web design business.