For the last few years, I have earned a living for my family as a freelance writer. I really feel blessed that I can do this from home, providing for my family’s needs and many of our wants. When you live on a freelance income, though, you need to carefully manage your finances because they can change from month to month. Clearly, the best option is to try and find regular, long-term gigs that can provide a relatively stable income base each month (although those can end abruptly), while short-term projects can make up a larger bulk of your income.

Creating a Budget

I don’t have a particularly strict budget, but I do have a general idea of my regular income and expenses. I know which expenses need to be paid each month, and roughly what my average monthly income is. One of the ways you can budget for the coming year is to take last year’s yearly income, and divide it by 12. Then figure your monthly expenses (dividing quarterly estimated taxes, insurance and other periodic expenses appropriately to get monthly amounts). You can get a general idea of where you are at. Make sure that you have enough income to cover your expenses each month. And realize that a freelance budget has to be somewhat flexible.

Chances are that some months you will make more than your average income, and some months you will make less. On months that you make more than your average, save the excess to help you make up the shortfall on months that your income is lower than you expect.

Diversifying Your Projects

Diversification is one of the cardinal rules of investing, and it applies when investing in yourself as a freelancer. At one time, I relied on one client for half of my monthly income. When the recession forced that client to make big cuts, I found my workload — and my monthly income — much smaller. I still work for that client, but earning a fraction of what I did before. I was fortunate enough to find replacement gigs rather quickly, but that experience taught me a valuable lesson: Don’t rely too much on one client for your freelance income. Diversify your clients so that no one client has a disproportionate hold over your monthly earnings.

Regular Financial Assessments

Even though you have a budget for your freelance income, it is still important to regularly assess your situation. This can be done every month or so. It doesn’t take very long, and you should base your assessment on these five areas:

  1. Current Income: Income that you made in the last month. This is income that came directly into your bank account — income you received from freelance projects and that you have right now.
  2. Living Expenses: These are the personal expenses that you incur, that don’t have to do with your business. These are your bills and entertainment costs and savings. You want to make sure that your current income is covering your living expenses.
  3. Operating Expenses: Because I’m a writer, my operating expenses are relatively low. I need a fast, reliable Internet connection. Every two or three years, my computer, used daily as a workhorse, needs to be replaced. Other freelancers have more operating costs, for supplies, equipment and even travel. Make sure that you arrange your budget so that you can pay to keep your freelance business going.
  4. Outstanding Income: This is always a depressing figure. You should add up how much you are owed for work you have already completed. Send reminders to those who owe you money, reminding them of their obligation to pay you. Unfortunately, especially if the payment is more than 30 days late, this is not income you can really rely on to help you.
  5. Future Income: You can get an idea of how you will do going forward by considering the work that you have lined up for the future. There should be a cushion here, since future income can so easily become outstanding income. If I agree to do a large project for someone, I require at least half the money up front, and I refuse to start until I receive that deposit. That way, I get at least partial compensation for my time and effort.

Freelance income requires that you make provisions for what could happen if you lose a client, or if you have a really bad month. It is possible to live on a freelance income, but it requires vigilance and planning.