So you're a freelancer and your budget is all over the place. Here's how to build a solid budget when you have a variable incomeFreelancing is great, but there are some things I miss about full-time employment:

  • Free coffee
  • Mingling with coworkers
  • Cheaper health insurance

And a steady paycheck. For the most part, my income doesn’t vary too much from month to month, but it does vary. Even though I have the luxury of steady work, there are still certain factors that can make my monthly income difficult to predict, like how long it takes a client to pay. Here’s how I’ve learned to budget with a variable income over the years.

I Budget Based on an Average

The lady who cuts my hair once described her freelance business as “feast or famine.” You can feast like a king one month, and then find yourself eating Ramen every day the next. You don’t want to budget based on “feast” months because, during those months of so-called famine, you won’t have enough to pay the bills.

Instead, I budget according to my lowest paid month from the past 6 months. I use that amount to come up with a spending plan using zero-sum budgeting. With a zero-sum budget, you list all of your basic living expenses, budget for them, then put the excess to work, giving every dollar a specific job, whether it’s paying off debt, saving for retirement, or some other goal.

My budget errs on the side of caution, but if your income doesn’t vary too much and has been fairly steady for the past year, you might just consider using your average income from the past twelve months. This way, you’re sort of getting the best of both worlds. When your salary is higher than average, you can save the leftover amount. When your salary is lower than average, you can use that leftover money to pay yourself more. 

Don’t Forget Your Business Expenses

Business expenses: I’m not just talking some notepads and pens for your home office. When you’re freelance, you have to pay your taxes throughout the year, you have to pay for your own health insurance and, ideally, you’ll be able to sock away some cash for retirement. And the thing is, you want to make sure you can afford all of these expenses before you pay yourself a salary.

The bottom line: in order to actually create a budget with a variable income, I’ve found that you have to come up with some realistic number to pay yourself every month, even if it changes later. Also, I reassess my situation every few months and adjust my paycheck accordingly, in case my income has taken a hit.

I Beefed Up My Emergency Fund

As one financial planner suggested over at Consumer Reports, it’s ideal if you can beef up the amount in your emergency fund if you plan to be self-employed:

Tom O’Connell, president of International Financial Advisory Group, in Parsippany N.J. recommends his self-employed clients aim for an emergency savings fund that can cover at least six to 12 months of living expenses as extra protection, just in case they hit a dry spell and have no income. That’s double what he recommends for clients with jobs that offer steady benefits. “The worst thing you can do is dip into retirement savings or college savings because you don’t have a large enough backup pool,” he says.

Again, this might not be super realistic for everyone. It’s hard to save that much money when you’re just starting out as a freelancer. If possible, it’s good to ease into self-employment with a buffer, and sometimes that means freelancing while you have the steady income of a regular job.

For example, before I moved to Los Angeles to pursue a writing career, I used my full-time job to save for a “What If I Can’t Find a Job” fund. A little over a year into my relocation, I completely drained that fund, thanks to a tax mishap. I’m not sure what would have happened if I hadn’t had that extra money saved to begin with, though. An emergency fund gives you the freedom and flexibility to make certain choices, like not giving up on your goal to be a freelancer.

I Separate Business and Personal Accounts

For a long time, I didn’t really see a need to separate my business and personal finances. Everything was so straightforward that it really didn’t seem to matter.  But as my freelance business grew, I started hiring subcontractors to take on tasks like video editing, graphics, transcribing, and so on. I also had more business expenses, like software, apps, and conference fees. My situation became a bit more complicated. Now I had to worry about deductions, expenses, taxes, and paychecks. It was time to open separate accounts just for business. Here’s my system:

  • A business checking account: This is my main account to receive client payments and pay for business expenses.
  • A business savings account: I use this to save for taxes.
  • My personal checking account: This is where I pay for all of my personal bills and expenses, like mortgage payments and groceries.
  • My personal savings account: My emergency fund.

Not only is everything separated and easier to find (it’s super easy to search for tax deductions now), this system makes budgeting easier in general. I simply pay myself a regular “paycheck” from my business checking account every month on the same date. The money goes directly into my personal checking account. It’s like getting a paycheck from an actual employer (but the employer is me). You might prefer to split your monthly payment into bi-weekly payments.  I like to keep things simple, so I just pay myself once a month.

This is the gist of how I budget with a variable income, but I do tweak the system every now and then to see what works. That’s just kind of the nature of the business. If your income isn’t steady, chances are, it’s going to take some trial and error and customization to figure out what works for you. If you can pay yourself a guaranteed amount every month, though, it’ll go a long way.

Does your income vary? If so, let me know how you manage to budget.

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Kristin writes about money, travel, and human behavior at Lifehacker, the New York Times, New York Magazine, and Mentalfloss. She's also written for NBC News, Fox Digital, and Scripps Network Interactive. Her book GET MONEY will be available on 3/27/18 with Hachette Books.