If you’re new to freelancing, your first year can bring a huge learning curve. (Ask me, a long-time freelance writer, how I know.) You go from a steady, predictable paycheck every two weeks to getting paid in dribs, drabs and lump sums. Then come the inevitable dry spells.
Not knowing when the next paycheck will arrive, while also setting money aside for taxes, requires thinking about your budget in a whole new way.
Throw in today’s unpredictable economy, where people are anxious about layoffs or reduced hours and increasingly rely on side hustles and gig work to get by, and managing inconsistent income becomes one of the most important personal finance skills you can develop.
Here’s what you need to know about how to create a variable income budget.
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Why Is a Gig Worker Budget Different?
Traditional budgeting is built on knowing how much money is coming in, how much is going out and what you can do with what’s left over. But freelancers, gig workers, commissioned salespeople and seasonal employees don’t have that certainty.
To paraphrase Frank Sinatra, self-employed people quickly learn what it means to be “riding high in April, shot down in May.”
“The danger isn’t the dry spell, it’s spending the good months like they’re the new normal,” Reggie Fairchild, certified financial planner and president of Flip Flops & Pearls Financial Planning in Charleston, South Carolina, wrote in an email interview. “The lifestyle you built in March still has a payment due in July.”
Considering that nearly 40% of employees report living paycheck to paycheck, even with steady incomes, surviving when you aren’t sure if, when or how much you’ll get paid can be even more challenging.
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Practical Budgeting Steps for Self-Employed Workers
Learning how to manage inconsistent income can reduce financial stress and help build long-term stability.
Here’s a step-by-step for getting started.
1. Give Yourself a Salary
Your income may change, but creating a consistent monthly paycheck for yourself makes budgeting easier. Base that number on the lower end of what you typically earn.
If your monthly income ranges from $4,000 to $8,000, for example, budget as though you earn $4,000. If you’re new to freelancing, use a conservative estimate.
When you receive a large commission or freelance payment above your base level, Fairchild recommends thinking of it as inventory rather than spendable income.
“The big check goes in the bank, and then you pay yourself a steady, modest monthly salary out of it,” Fairchild wrote.
2. Build a Buffer Account
You’ve probably heard the advice to build three months’ worth of expenses in an emergency fund, but people with irregular income should work toward a bigger cushion. “I tell clients to aim for six months of bare-bones expenses,” Peter Bo Rappmund, CFP and principal at Counterpoint in Santa Fe, New Mexico, wrote in an email.
“Three months gets you breathing room. Six months gives you the ability to turn down bad work. This is when a freelance career starts to improve,” he added. As someone who spent 20 years as a freelancer himself before going into financial planning, Rappmund speaks from experience.
Bonus tip: When a big payday hits, allow yourself a small splurge, such as a nice dinner out or quick weekend getaway, says Fairchild. Direct the rest toward covering slower months and future savings. “The treat keeps you sane. The discipline keeps you solvent,” he wrote.
3. Plan for Taxes
Unlike W-2 employees, self-employed workers are responsible for paying their own taxes. “Someone just starting to freelance might not realize that self-employment tax alone is 15.3%,” Rappmund wrote.
A good rule of thumb for commissioned and self-employed people is to set aside 25% to 33% of every payment for federal and state taxes. “Move it to a separate account immediately so you’re not borrowing from the tax man to fund your lifestyle,” Fairchild wrote.
4. Save for Retirement
Without a pension or employer 401(k), saving for retirement becomes your responsibility.
“It’s critically important to ensure that every month you are saving for your future,” Taylor F. Turner IV, chartered financial analyst, principal and owner of Taylor Turner Wealth Management, LLC, wrote in an email.
The key is starting and being consistent. “Consistency will do you so much more good in the long run. Your income is already variable enough; don’t let your savings have the same behavior.”
Accounts such as a SEP IRA are designed specifically for self-employed workers. A financial advisor can help determine which retirement account best fits your needs.
5. Try Zero-based Budgeting
A zero-based budget assigns every dollar a purpose.
For people with irregular income, Fairchild suggested assigning every dollar of the salary you’ve established for yourself rather than every dollar you earn each month. “That keeps the plan steady even when the income isn’t.”
Anything you earn above that salary can go toward your emergency fund or other financial goals. If your income falls short, your emergency fund can bridge the gap until earnings recover.
6. Create Automation Rules That Grow With Your Income
Having a plan for larger paychecks removes decision fatigue. Instead of assigning fixed dollar amounts, consider assigning percentages.
For instance, your rule might be to put 50% of available funds into your emergency fund (if you’re still building it), 30% toward deleting debt, 15% toward your next vacation and 5% for a small splurge.
As your income grows, your savings automatically grow, too.
Sample Irregular Paycheck Budget
If you’re navigating irregular income because of fewer work hours or gig work, here’s a budget example you can emulate.
— Average monthly earnings: $3,000 to $5,000
— Budgeted monthly income: $3,000
— Taxes: $600 (20%)
— Remaining for expenses, debt payments and retirement savings: $2,400
Divide anything earned above $3,000 according to your preset rules. Make the highest portion go into your buffer account (until it’s fully funded). The rest can be allocated at your discretion toward personal savings goals, more aggressive debt payoff, spending on things you want, or small rewards.
You can then allocate any income above $3,000 according to your predetermined percentages.
For example, if you earn $5,000 in one month, you could allocate the additional $2,000 like this:
— $1,000 to your emergency fund
— $400 toward debt
— $300 for expected expenses, such as vehicle maintenance, home repairs or healthcare
— $200 to retirement or other long-term savings
— $100 for discretionary spending
The Bottom Line
Budgeting with an irregular income takes planning and flexibility, but it becomes easier with practice. By building a buffer, preparing for taxes, and following a spending plan based on your lowest expected income, you can create more financial stability, even when your paychecks are unpredictable.
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How to Budget When Your Income Is Irregular: Advice From the Experts originally appeared on usnews.com
