You’ve been diligent in maintaining your household budget while working your full-time job. The categories are all populated, the debts are paid off, and you even have an emergency fund. With everything in order you’ve decided to take the next step in your life – quitting your job and turning your hobby into a freelance career. This is great, but it comes with some caveats, including an un-steady income and a change to the way you budget. Here are a few items to consider when making the big change.
What Was One is Now Two
First thing to do is create a new budget and category setup for your freelance job. You’re probably wondering why you aren’t utilizing the existing household budget for this. There are two reasons. First, you want to create a new bank account for your freelance expenses — more on that in a moment. Second, putting your income into your household budget can cause confusion when trying to figure out how to distribute the funds.
Pay Your Expenses, Not You
You still have expenses such as rent, mortgage, utilities, groceries, etc. These always need to be paid with the amount of money received from your freelance jobs. However, instead of sticking the whole amount of your electric bill into the utilities category after one payment, look to divide it up depending on your income schedule. For example, if your rent is $900, utilities are $200, and you receive a weekly payment of $1500, don’t pay the rent and utilities at one shot. This leaves you with less money for other needed items, like food and gas, and can mess up your upcoming budget sessions.
Pay Your Business
Here’s why you want to set up a separate bank account and budget for your freelance company — you will have business expenses. Be it gas, items for your computer, office materials, advertising, or business lunches, these need to be separated out from the household expenses. Whatever is left after filling these categories becomes the amount of income you made for that period.
Going from the corporate world to a freelance job means someone else isn’t calculating how much federal and state tax needs to be taken out of each payment. In the end, you’ll need to find a way to calculate these numbers and add an amount into your business budget. When you pay these taxes depends on how you file yourself with the government when you switch careers. Some may need to pay them by April 15 while others need to pay quarterly estimated taxes. Best to consult with an accountant or the IRS for more information.
Another item to consider in your business budget is health insurance. Regardless if it comes from the health care markets being set up in individual states or through some place like Blue Cross, you will end up making larger out-of-pocket payments for your health care when you freelance. Like your emergency fund, make sure this account is padded as much as possible in case of a medical emergency.