There are many advantages to working as a freelancer. You can choose interesting projects from different employers, take the amount of work that is optimal for you in a certain period of time, plan your own working hours and rest, even travel while working. But don’t rush to draw conclusions. The biggest freelance problem is chaotic income. Here are a few tips from online broker FinmaxFX.
When you cannot count on a certain amount of money once or twice a month from your employer, there are a number of problems. Difficulties in financial planning, difficulties in achieving financial goals, acute issue of pension savings. Here are a few steps to help you meet your short-term obligations (food, housing, clothing) and to achieve your long-term financial goals, including buying a home, starting a family and retiring.
Step one: Create a budget using your average income
If you have been living with irregular income for more than a year, calculate your average net income. This is easy: Calculate the amount you earned in a year and divide it by 12. Use this number to build your monthly budget – calculate mandatory payments, savings and free money.
If you work in a freelance format for only a few months, regularly recalculate your average net income. So you will see the real figure, taking into account both profitable and “modest” times.
When you’ve figured out your average monthly budget, calculate all your average monthly expenses. If the average cost is higher than the average income, it’s a big reason to think about it. Even if you are not experiencing financial difficulties in a particular period. You need to think about ways to increase your income or cut costs in order to balance your budget.
Step two: Budget with three bank accounts
The most convenient way to manage a budget with irregular income is through three linked bank accounts – two high interest savings accounts and a current business account.
You deposit all your income from any source on the first account – don’t forget to refund taxes, bonuses and tips. From this account you pay yourself the monthly amount you calculated earlier – you can call it your own “salary”. To make this system work, you need to keep a minimum of three to six months of expenses on the account. This will keep you safe in times of lack of projects. Be sure to keep your monthly “salary” the same and do not be tempted to spend extra money when you had a profitable month. This money should be saved for more difficult times.
The second savings account is designed for your obligatory expenses, the non-payment of which is fraught with great consequences. This can include tax payments, loan repayments, rent payments, education payments, and contributions to a private pension fund. Set up a transfer of the required amount from the first account to the second and, if possible, automate your mandatory payments from the second account.
The third account is for your current optional expenses. This is where your “salary” comes in to yourself. Use this account for daily living expenses – for food, transport, clothes and other necessary purchases.
Step three: make important savings
A typical psychological trap of a freelancer is to justify the lack of savings by irregular income. In fact, it’s the opposite. The more irregular and modest your income is, the more attention you should pay to your savings. The key ones are financial airbags equal to 3-6 months of your average income and pension savings. You can save the pillow in your first account, where all the income flows into, and for pension savings you need to consider separate financial instruments.
Building a realistic budget and living with irregular income requires patience and practice. Therefore, you should always be more likely to have your financial situation mapped out, calculate a realistic amount of your average income, and pay special attention to the important savings that will support you in difficult times.