I'm a freelancer. Here's how I budget for cash flow problems

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I'm a freelancer. Here's how I budget for cash flow problems

While freelancers such as myself can admittedly roll out of bed, turn on our laptops, and work in our PJs (or err, wear the same thing several days in a row), a major trade-off in the supposed freewheeling solopreneur life is giving up a steady paycheck. As a result, the inevitable lulls in work, stressful "feast-or-famine" cycles, and 30-day time frame for a client to pay an invoice can result in cash flow problems.

Budgeting is a weird obsession of mine, and since I began freelancing full-time a few years ago, I’ve played with different systems and strategies so I don’t have to freak out — as much — when there’s a lag in payment.

Here are some tips I’ve learned along the way on managing my freelance cash flow.

1. Have a separate emergency fund for your freelancing business.

Just like freelancer couple Tonya Rapley and her husband Khomari Flash, keep separate emergency funds for your freelancing business and your personal expenses. Your business e-fund can help cover business-related expenses, while your house fund can cover a costly car repair or urgent dental procedure.

The amounts you need for each account can vary, but once you’ve been freelancing long enough, you can gauge how much to save for business-related expenses. In the interim, start with squirreling away at least 30% to 40% of each check that comes in. That’ll help you cover quarterly self-employment taxes, plus a few months of your health insurance.

2. Keep a one-month mini-buffer.

On top of keeping an emergency fund of say, three to six months, setting a one-month reserve of living expenses aside has prevented me from panicking during a slow month. This mini-emergency fund also comes in handy when I spent more than normal or neglected to budget for a one-off expense.

Feeling overwhelmed already? No worries. Start small. Commit to saving, say, $500 in your buffer fund. If you tap into the account, do your best to get back to that $500 mark. And when you can, ramp up how much you keep in this account.

Once you have a mini- and main emergency fund for your business, figure out the scenarios where it’s OK to take money out of either one. For instance, I’ll tap my mini-emergency fund if I need a few hundred bucks to tide me over to my next check, or if I spent more than I budgeted for, say, at a work-related conference. If it’s an expense that’s greater than a few hundred dollars, I’ll pull money out of my main emergency fund.

3. Ask for a shorter net for invoices.

While 30 days is the standard term for a client to pay you after you submit an invoice, try requesting for a shorter payment period. For instance, ask for a 7-day or 14-day turnaround on payments. Of course, the answer depends on the client, the kind of relationship you have with them, and if they have a specific invoicing process in place, but a client might surprise you.

One of my freelancer friends requests shorter payment turnarounds from ongoing clients and they normally oblige. While your clients might not be so accommodating, it certainly can’t hurt to ask, especially if those paychecks are particularly important to your financial well-being.

4. Stay one month ahead of your living expenses.

Of all my budgeting tactics, this one has been the most helpful in preventing money-related stress. Because I make it a top priority to have enough at the end of each month to cover living expenses for the next one, I don’t fret over whether I can pay next month’s bills on time. As a result, I’m able to automate payment for most of my bills, including Netflix or paying off credit cards.

Staying one month ahead of your bills may sound like a tall order, especially when you’re trying to rake in enough income to get through the current month. But, the beauty of this trick is that (for the most part), it’s a one-time goal. You only need to save enough for an extra month of living expenses once to set this strategy into motion.

To pull it off, create a savings account (yes, another one) and sock away money whenever you can. You might have "extra" funds from having an awesome month, a cash gift, or a well-timed side hustle. Before you know it, you’ll have enough to get ahead by one month of your bills.

Having to deal with lags in cash flow is a major money woe for most freelancers. However, if you focus on structuring your budget in a way that accounts for these lags, you won’t enter freak-out mode the next time a check gets "lost" in the mail.

Need more help managing your money? Here are some solid budgeting apps for freelancers.