Freelancers: How to Budget with a Variable Income

Freelancers: How to Budget with a Variable Income

Are you hesitant to go freelance because of the variable income?

It’s true – some months the cash will roll in, and others, not so much. But, this fact shouldn’t deter you from becoming self-employed.

You can budget and financially thrive despite fluctuating revenue. It just takes a little preparation and discipline to budget when your income varies.

If you have a Variable Income, Start with Your Expenses

While dealing with variable income is par for the freelance course, your expenses are usually more stable — and they can be adjusted if necessary.

Take a look at all of your regular monthly bills and purchases.

Which of them are truly necessary? These expenses generally include things like:

  • shelter
  • food
  • utilities
  • transportation
  • health care/medication
  • insurance
  • minimum debt payments

Next, review your discretionary spending, to include:

  • eating out
  • shopping
  • monthly subscriptions or memberships
  • financial goals

Add up your spending under both categories.

Your baseline freelance income goal is to earn enough to cover your truly necessary expenses and avoid using your nest egg, or taking on debt. You may find that you need less income to stay afloat than you thought. That’s great — it takes some of the pressure off.

Then, any extra income you bring in can be used for fun things or to pursue long-term goals.

Optimize Your Expenses

It may sound simple, but it’s important to remember that: the less money you need to live, the less money you need to earn.

Now, you don’t necessarily have to practice extreme frugality (it’s cool if that’s your thing). But, you should take a very critical eye to your expenditures.

Which of them don’t add value to your life? Cut them!

Which can be optimized to save you money? Get to it!

Optimizing your expenses should be a continuous process based on your ever-changing needs, preferences, goals, and circumstances. You can go as subtle or extreme with it as you wish.

On the subtle side, you could do things like:

  • use coupons
  • shop at thrift stores
  • cut cable
  • eat out less
  • cut your own hair (I’m not that brave!)

On the extreme side of things, you could:

  • move to a lower cost of living area
  • get a roommate
  • sell your car

Every dollar you leave in the bank now is one you can count on when you really need it. So, try to save money any way that fits into your desired lifestyle.

Pare Down Your Debt

Debt payments can put a huge strain on your budget (regardless of where your income comes from).

High-interest credit card debt is the worst offender. Sure, the minimum monthly payment may be manageable. But, that balance will stick around for a long time — likely years after what you purchased found its way to the scrap heap.

So, work hard to slay that debt as soon as possible. Your monthly budget will look a bit rosier, and you’ll save a ton of money over time.

Got Student Loans?

Student loan debt can also cause serious cash flow issues. If you’re not on an income-driven repayment plan, it could be worth looking into. It helped me reduce my payments to practically nothing because my business didn’t make a lot of money right away. (Note: as your income increases, your monthly payments will, too.)

Got a Mortgage?

If you’ve had your mortgage for a long time, interest rates may have dropped since you closed on your home. You may be able to save money each month by refinancing the loan. (Be aware, however, that you will experience upfront costs to process the refinance.)

Similarly, if you’ve got a 15-year mortgage, consider refinancing to a 30-year mortgage. Yes, you will have the debt for a lot longer. And, yes, you’ll pay more in interest over the life of the loan if you take the whole 30 years to pay it off.

But! Your monthly payment will drop significantly, making it easier to live on a variable income. And – you can pay more on the principal when you have extra cash to pay the debt off sooner.

Related Reading: Debt sucks and should be dealt with. But – it doesn’t have to stop you from starting your freelance business. I started my business 300k in debt, and I regret nothing!

Beef Up Your Nest Egg

When you have an income that varies and you don’t earn enough to cover your truly necessary expenses in a given month, you can tap into your nest egg (cash cushion, emergency fund, whatever you want to call it).

And, as a new freelancer, your income may be low. That’s why having a hearty balance in your nest egg is so important! It makes variable income feel less scary.

Pro Tip: Keep track of what you’ve withdrawn from your nest egg, and replace the funds when you have richer income months. That way, you keep the account balance high.

How Much Do You Need?

The amount of cash you need really depends on your personal cost of living, your risk tolerance, and how much time you’re willing to invest in getting your freelance business profitable.

If you’ve got low expenses, like to throw caution to the wind, or you’re good with getting another full-time job relatively soon, you may be fine with 3-6 months of baseline expenses in the bank.

But, if your expenses are high, you always err on the side of caution, and you’ve adopted the mindset that you are NEVER going back to a cubicle, then you’ll probably want a lot more money tucked away. I had 12-18 months of expenses saved up when I went freelance. Not everyone will have that amount, and that’s OK because you have options.

How Do You Beef Up the Balance?

Bank every dollar you save from optimizing your expenses. Sock away any windfalls (inheritances, tax refunds, gifts, bonuses from your J-O-B).

You can also consider freelancing part-time, at first, saving all of those earnings. Then, when your freelance income covers your truly necessary expenses, and you have a sufficient nest egg, quit your job.

Your Next Steps to Dealing with a Variable Income

If your monthly income exceeds your expenses and your cash cushion is fully stocked, you’re in the prime position to tackle other financial goals!

You may want to consider opening different accounts for each goal (i.e., home-buying fund, vacation fund, etc.). That way, you won’t be tempted to spend the money on other things, and you can see your true progress towards each objective.

But, if business is slow for an extended period of time and your cash cushion is dwindling, consider picking up a side hustle or part-time job to preserve your nest egg. You can always scale back on those endeavors when your freelance work picks up.

Final Thoughts

As a freelancer, your two biggest financial assets are your nest egg, and your ability to adjust your spending based on your earnings. These two powerful levers enable you to both survive and thrive with a variable income.

While it will take some time and effort to get this system up and running, hopefully, knowing what you need to do takes away some of your financial fear.

Just remember, your budget and financial situation will change with your life. So, be sure to revisit and revise as needed.

Going freelance isn’t easy, but it is possible! You got this!

Have questions? Book a FREE 15-minute call with me here.

Learn by listening? Download this podcast episode about budgeting with a variable income.

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