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Budgeting Tips for Freelancers

Wait, my tax bill is HOW MUCH?!

There’s an oft cited report by Freelancing in America that resurfaces every few years with a very startling claim. By 2027, the report says, over 50% of American workers will be freelance.

(The same data isn’t available in Canada, but they’re our closest neighbours, so it’s not unreasonable to imagine this future up north, too.)

If this report is accurate, a whole whack of us are gonna have to figure out how to budget—and handle our taxes—without the support of an employer, or a regular paycheque. It’s not necessarily a simple task to find that perfect system, but there are a few good rules of thumb to consider.

Budgeting for a Freelance Income

In freelancing, perhaps the biggest departure from salaried work is that you’re no longer guaranteed a steady paycheque every two weeks. This variation can make budgeting really tough.

(On the upside, you’re allowed to sleep ‘til 11 and take meetings from your garden, so… worth it? Still undecided.)

Calculate Your Average Income

Unlike granular budgets which allocate specific dollar figures, ratio-based budgets can change with you as your finances and income ebb and flow. For this, we suggest the 50/30/20 Budget, which in our opinion is the gold standard for income allocation: 50% of your net income pays for your needs, 30% pays for your wants, and 20% pays for your financial goals, like retirement.

This budget is useful for freelancers because it’s flexible. Say one month your budget looks more like 60/30/10. No biggie. The point is keeping consistent tabs on how you spend your money.

To get started with any budget, though, you need a starting point: your average income. This is the number you’ll use to create your budget, and is generally in the ballpark of what you earn every month.

Take what you earned over a period of 6 months or a year, add it all up, and divide it by 12. That’s your average monthly income.

As a freelancer, it’s normal to see busy and slow periods, like around Christmas or the summer holiday. Knowing when you’re likely to receive less work, and therefore less income, will help you budget for those months in advance.

Prioritize an Emergency Fund

Emergency funds are flexible. Say you need to end a relationship with a client, and it’ll take time to find new work. You’ll want to have a cushion to fall back on. It’s important to build contributions to your emergency fund into your budget.

Emergency funds are meant to cover your expenses if you were unable to work for six full months. Yikes! That’s a lot of money, you might be thinking. Yeah, it is—but if you don’t pay into Employment Insurance, which many freelancers don’t, you should have a safety net.

Emergency fund contributions can come from a portion of the 20% from your 50/30/20 Budget. The fun thing about emergency funds is once you’ve reached your goal, you can begin allocating your monthly contribution for that fund to something else instead.

Save For Retirement!

As a freelancer, it’s also important to prioritize your retirement savings. As a salaried employee, generally a portion of your paycheque is automatically deducted for Canada Pension Plan (CPP) contributions; and these are sometimes even matched by your employer.

Without those contributions, you’re not paying into CPP, and are thus not entitled to CPP pension benefits for those earnings. Yeah. Spooky.

So it’s up to you to build this important cost into your budget. Maybe you choose not to contribute to CPP but opt for socially responsible mutual fund investments or low cost exchange traded funds instead. That is up to you (though we encourage you to meet with a professional financial advisor to help you decide the best strategy to reach your personal financial goals!).

But you should start thinking about retirement early, or you may find yourself at a serious disadvantage later in life.

Save Up For Your Taxes Ahead of Time

Because no taxes are deducted from your income at the source as a freelancer, it’s more likely that you’re going to owe the Canada Revenue Agency for income taxes when Income Tax time comes around. And it might not be peanuts—it’s possible you could owe several thousand dollars after a year’s work depending on how much income you earn.

    According to Turbotax, the brackets are as follows:
  • 15% on the first $48,535 of taxable income, plus
  • 20.5% on the next $48,534 of taxable income (on the portion of taxable income over $48,535 up to $97,069), plus
  • 26% on the next $53,404 of taxable income (on the portion of taxable income over $97,069 up to $150,473), plus
  • 29% on the next $63,895 of taxable income (on the portion of taxable income over $150,473 up to $214,368), plus
  • 33% of taxable income over $214,368

As you can see, taxes are charged at a progressive, graduated rate. You can use estimates of your past annual earnings and the chart above or an online calculator to get an approximation of what you may owe.

Then divide that big ol’ lump sum you may owe by 12 and get into the habit of saving that amount, every single month.

Budgeting as a freelancer can be very tough. Since you’re not attached to a larger company as an employee, there’s a lot you need to pay attention to that an HR or accounting department may otherwise handle for you if you were an employee.

But with freelancing on the rise, it’s important to know that having a healthy budget is possible, and it could be the key to a fun, exciting career spent doing what you love.

Don’t freak out! You got this. 💪

This blog is provided for informational purposes only, isn’t intended as investment advice and personal tax advice, and isn’t meant to suggest a particular investment or tax strategy is suitable for any particular investor or freelancer. If you’re unsure about an investment or your personal income taxes, you may wish to obtain investment advice or accounting and tax advice from a qualified professional.

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