ICBA Blog

8 Steps to Making a Budget as an Independent Contractor

Yes, you can make a monthly budget even though you live the 1099 life. Here’s how.

The concept of a monthly budget is a no-brainer for people who rake in a regular paycheck every two weeks. But for those of us working as independent contractors or cobbling together an income earned from rideshare driving or other gig economy jobs, budgeting involves a little more planning. Rest assured it is possible to make a monthly budget, even with sporadic levels of income.

Determine what you spend
The first step to any successful budgeting plan is to determine your monthly expenses including rent or mortgage, utility bills, car payment, credit card bills, average grocery expenses, your gym membership, and any regular business expenses. You can do this the old-fashioned way with pen, paper, and calculator, but of course you can also find an app to track your spending. Try Mint, or check out this list of apps from Forbes.

Determine your average monthly income
The point of a budget is to spend less than you make, so you’ll need to determine your monthly income. Unless you work in a field that allows you to have anchor clients, your freelance or gig income is likely a bit sporadic. One month you might pull in a lot of cash and another month you might be low on funds. But you can figure out your average monthly income over the course of the past year. Take a look at your bookkeeping app (like FreshBooks or QuickBooks) and view your collected income for at least 12 months. Add up the total and divide by 12. That’s your average.

Determine what you need for taxes and savings
As an independent contractor, you have to set aside cash to pay your income taxes and self-employment tax. The Balance recommends aiming for 20 to 30 percent of each paycheck, but check with your tax professional. Determine what 30 percent of your average monthly income is and know that portion is off-limits for spending.

Everyone should set aside money to save for emergencies and future necessary big-ticket purchases. Freelancers should also have this cushion to draw on in the event of late payments from clients, lost work due to illness, and other unexpected situations that can bash a budget. Set aside an amount from each paycheck that will grow you a nest egg. Aim for 10 to 20 percent.

Determine what’s leftover
The amount you have left after paying bills, taxes, and setting aside cash for savings is your disposable income. This is the money you can use for going out with friends, buying concert tickets, treating yourself to a new outfit, etc. So often our budgets get derailed because we think we have more disposable income than we actually do. Having a handle on the number and creating a system to manage the spending will prevent problems.

Reassess your spending if necessary
If you don’t have much leftover, or worse, you’re going into debt each month, take a look at the expenses you can cut. Maybe you can axe the cable bill, get a roommate, dine out less, or find ways to trim costs as a family. Alternatively, consider increasing your income. Can you raise your rates? Can you take on more work?

Manage cashflow with separate accounts
How you handle cashflow will depend on your tax structure and individual circumstances. Talk to your trusted tax professional for a customized plan. The following cashflow concept is an example of how sole proprietors might manage their money. It is not intended as tax or financial advice, however.

Your bank should allow you to set up several different accounts. Maintain your business finances with both a business checking account and a business savings account. Any payment you receive should go into your business checking account. When funds become available, immediately make a transfer of your tax percentage (of that payment) to your business savings account—an account that you’ll only touch when it comes time to pay your estimated quarterly taxes. Your savings percentage will remain in your business checking account so that it develops a cushion for “famine” months in the freelance cycle.

You should also have a personal checking account and personal savings account. Give yourself a paycheck from your business account to your personal account every two weeks. Determine the amount by dividing your average monthly income (minus the tax percentage, the savings percentage, and any regular business expenses) in half.

Pay all business expenses using your business checking account and all personal expenses using your personal checking account. At the end of each month, transfer cash left over in your personal checking to your personal savings account. This would be any disposable income you didn’t spend.

Keep on track with your average monthly income
Part of maintaining a budget as a freelancer is knowing where the money is coming from and when it will be available and then also hustling to meet income goals when necessary. Your bookkeeping app will give you an overview of what you’ve billed out, but it may not offer you a picture of when the money will hit your account. Make a spreadsheet with the months of the year across the top and your client or project list down the left-hand side. Mark the amount you’ll be paid from each client in the month you’ll receive the payment. The totals at the bottom will tell you if you’ll reach your goal for each month or if you need to take on more work.

Determine your desired average monthly income
Most of us would like to make a bit more cash to pay the bills, enjoy life, or take a vacation. Look at your average monthly income and determine what you’d ultimately like to see as that number. Brainstorm ways to reach that goal. Could you spend more time driving for rideshare apps or seek out higher-paying clients? Reassess your average income every six months. If you’re bringing in more, that means you should be saving more, as well.