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Freelancers: How to Budget for an Irregular Income

This guest post comes from the editors of The Allstate Blog, which helps people prepare for the unpredictability of life.

Are you part of the new freelance economy? Driven by both economic necessity and a desire to take control of their income, many Americans are leaving their cubicles behind to earn money as freelancers or from commission-based jobs.

Freelancers essentially work job to job, potentially working on specific projects for a number of different clients at any given time. Often referred to as ‘independent contractors,’ freelancers are generally not employees of a company who receive benefits and often do not work on-site for their clients. Common areas of freelance work include writers, graphic designers, etc.

“The declining economy forces people to think more creatively about how they earn money, and in general, people are questioning the idea of job security more than ever before,” says Chris Guillebeau, author of The Art of Nonconformity.

Saying goodbye to a regular paycheck, however, is no easy task, especially when first getting started. The same goes for individuals whose jobs are primarily commission-based, such as sales or real estate. After the rush of working from home fades, the reality of an irregular income sets in. Smart money management for commission-based jobs and freelancing can make the difference between living comfortably and scrambling to make ends meet each month.

Take control of your finances with some help these budget tips for freelancers and commission-based jobs:

Create a realistic budget ­­– and stick to it.

If you are switching from a steady paycheck to an unpredictable career as a freelancer, the first challenge is to create a realistic budget. Estimate an approximate monthly income. If you’ve been working for a few months, add up what you made each month and divide by the number of months to reach an average. If you’re brand new, talk to other freelancers about what to expect when you’re just starting out. Budget first for the fixed expenses: rent/mortgage, utilities, savings/retirement and debt repayment. Set a strict discretionary budget. Prevent overspending by putting cash in an envelope for “fun” expenses at the beginning of the month. When the cash is gone, so is the fun spending.

Create a safety net.

As a freelancer, income can be unpredictable. It’s important to prepare for the lean times by setting aside money during the more bountiful months. A good rule of thumb is to set aside three to six months of living expenses in an interest-earning savings account. If you have little to no savings, set up a monthly automatic withdrawal from your checking account. Consider this a “bill” that has to be paid each month, just like your rent or utilities.

Save for taxes.

Don’t forget that come April 15, Uncle Sam will be demanding his share of your paychecks. And, if you’re self-employed, you are required to pay estimated taxes every tax quarter.

  • Set aside 12.4 percent of every paycheck to pay for self-employment taxes, in addition to regular income taxes; otherwise, you could face a hefty IRS bill.
  • Don’t lose out on tax deductions. Be sure to keep track of your business expenses, including your monthly Internet and office phone bill.

Pay down debt.

Realistically, most people have some debt, whether it’s from student loans, a car payment or emergency expenses that went on the credit card and are still being paid off. If you’re in debt, it may seem impossible to pay your debt down and live on a freelancer’s salary. But, even with an irregular income, it can be done.

  • The first step is to stop accumulating new debt. Tighten your belt and say goodbye to credit cards.
  • Include debt repayment in your monthly budget.
  • If you have multiple credit cards, pay down the smallest one first, and move on from there.
  • If you are struggling with federal student loan debt, consider a temporary income-based repayment plan (IBR). While this is not a long-term solution – as you’ll be accumulating more in interest than you will be paying each month – IBR can lower your monthly payments while you get back on your feet.

Freelancers must also be careful with long-term money management, making sure to save enough to cover taxes, healthcare, etc. In these situations, freelancers may consider consulting a professional to ensure proper money management. Success may not come overnight, but with a realistic monthly budget, you will be well positioned to survive the lean times and come out debt-free.

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