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Making a living
Budgeting without a salary

Budgets challenge salaried people who know exactly how much and how often they’ll be paid. How on earth do you manage your money if you can’t predict how much will be coming in and when it’ll arrive? Here are some tips.

Review the past two years of monthly income. If you have been keeping track of income and expenses, as recommended in the Keeping Track section, this will be easy for you. If you’re just getting started, you can base your revenue estimates on bank statements. If you’re pressed for time, glance at your last two annual tax returns and divide each year’s income by 12. Use the lowest monthly income amount in the next step.

Keep monthly fixed costs 20 percent lower than the least amount earned in any given month. By keeping your cost of living lower than the smallest monthly amount you’ve earned in the past two years, you reduce the chance that you won’t earn enough each month to cover basic bills, especially since some clients take longer than others to put a check in the mail.

Fixed costs may include the business portion of your phone, Internet and website hosting bills; monthly subscription fees and 1/12^th of annual dues and subscription fees; office rental and utilities, or 1/12^th of the previous year’s home office deduction (if you took one); rental expenses for your mail drop and/or storage space, if any; and loan payments.

Save at least 20 percent of every paycheck for taxes. The Social Security and Medicare tax rates for self-employed workers total 15.3 percent of the first $117,000 of income in 2014. Although you get to deduct half of the Social Security and Medicare taxes in calculating adjusted gross income, you’ll also have to pay state and federal income taxes on your business profits, so 20 percent is a good number to start from.

If your freelance business is your primary means of support, 20 percent may not be enough to set aside for taxes. The federal government taxes the first $9,000 of an individual’s income at 10 percent and gradually increases the rate to 39.6 percent. Unless you have a lot of business expenses, your effective tax rate is likely to be above 10 percent.

If you freelance to supplement other family income and your expenses usually aren’t more than your business income, you might want to set aside an even higher portion of each paycheck so you’ll have enough to cover income taxes at your marginal rate.

Make savings automatic. Figure out what dollar amount constitutes 20 percent (or a higher percentage) of your lowest monthly income. Then, go to your bank’s website and set up an automatic monthly transfer of that amount into your savings or money market account.

Build an emergency fund. This is a fund you vow never to touch until trouble arises (you lose a major client, your furnace dies, etc.). People with full-time jobs should have an emergency fund that covers three to six months of expenses. Some people recommend that a freelancer have an emergency fund that represents one year of living expenses. If you don’t have an adequate emergency fund, this formula is worth using: Save 20 percent of your extra monthly income for taxes, 40 percent for your emergency fund and 40 percent in a retirement account.

If your emergency fund is adequate, maintain that same 20:40:40 savings formula, but now devote that fund toward saving for a special purchase, such as a car, wedding, vacation or down payment on a home. Other uses for the other 40 percent include starting a 529 account for children’s education, making an extra mortgage payment or adding to retirement savings.

You can keep it simple by slotting certain clients into certain bills: Checks for a weekly freelance newspaper column go into the retirement account; payments for articles for a food and dining magazine go into vacation savings; income from speaking gigs goes into the taxes account.

Freelancers who maintain a steady stream of regular clients find this is an easy mental exercise. If your work is more varied, you’ll have to rely on old-fashioned percentages.

Contributors: Paula Pant, Hazel Becker

Last updated: January 2015

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