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Monday, April 4, 2011
Freelance Toolbox

Filling in the gaps: Budgeting without a salary

By Paula Pant

Grab your checkbook: It’s time to pay the mortgage bill, the gas bill, the Netflix bill, the fine for paying that credit card bill two days late …

Budgets challenge salaried people who know exactly how much and how often they’ll be paid. There’s always some surprise car repair or doctor’s visit. 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:

HELP FOR FREELANCERS

SPJ offers many tools for freelancing journalists. See resources at the freelance page or Independent Journalist blog.

1. REVIEW THE PAST TWO YEARS OF YOUR MONTHLY INCOME

The easiest way to do this is to review your bank statements. If you’re extremely pressed for time, glance at your last two annual tax returns and divide each year’s income by 12, then use the lowest amount.

2. KEEP YOUR MONTHLY FIXED COSTS 20 PERCENT LOWER THAN THE LEAST AMOUNT YOU EARNED IN ANY GIVEN MONTH

I know, this is not attractive advice. But 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 your basic bills, especially since some clients take longer than others to put the check in the mail.

“OK,” I hear you saying, “but why 20 percent lower? Isn’t that drastic?” Nope, because you should ...

3. SAVE 20 PERCENT OF EVERY PAYCHECK FOR TAXES

The 2011 Social Security tax rate for self-employed workers is 13.3 percent on the first $106,800 of income, according to the IRS. (This is a reduction from 15 percent in 2010.) The good news: You get to deduct half of your Social Security tax from your income. The bad news: You then pay income tax, at a 25 percent marginal rate if you’re married and earn $69,000 to $139,350, or single and earn $34,501 to $83,600. (Full stats are available at irs.gov.)

4. SPEAKING OF TAXES:

Make sure you deduct all your business expenses. The easiest way to track this is to get one credit card for business purchases and one for personal expenses. Go to nerdwallet.com to review the rewards cards best for your personal profile.

5. THE EASIEST WAY TO SAVE IS TO DO IT AUTOMATICALLY

Figure out what dollar amount constitutes 20 percent 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. Ask for free overdraft protection, or search credit unions and online banks for the best low-fee or no-fee options.

6. “BUT 23 OUT OF 24 MONTHS, I EARN MORE THAN THAT.”

You’d better, because you’re not done saving yet. (Sorry.) Your first priority is to build an emergency fund. This is a fund you vow never to touch until everything falls apart (e.g. you lose a major client, your furnace dies). People with full-time jobs are advised to have an emergency fund that covers six months of expenses; I recommend freelancers have an emergency fund that represents one year of living expenses.

7. HOW DO I SAVE FOR THOSE THINGS?

If you don’t yet have an adequate emergency fund, then follow this formula: save 20 percent of your extra monthly income for taxes, 40 percent for your emergency fund and 40 percent in a retirement account. (Go to the Independent Journalist blog to compare various retirement account options for freelancers.)

If your emergency fund is set, congratulations! Maintain that same 20:40:40 savings formula, but now devote that 40 percent toward (your choice here): saving for a purchase, such as a car, wedding, vacation or down payment on a home; saving in a 529 account for your children’s education; making an extra mortgage payment; or adding to your retirement savings (the younger you are, the more impact every dollar you save for retirement will make).

THIS IS COMPLICATED. HOW CAN I SIMPLIFY?

I keep it simple by slotting certain clients into certain bills. The weekly freelance newspaper column I wrote paid into my retirement account. The stories I contribute to a food and dining magazine go into my vacation savings. If you maintain a steady stream of regular clients, this is an easy mental exercise. If your work is more varied, you’ll have to rely on old-fashioned percentages.

Former newspaper reporter Paula Pant is the blogger behind Afford-Anything.com, a money management blog. On Twitter: @AffordAnything

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