How to Manage Money When Your Income Is Irregular

When you're a freelancer or make an irregular income, it can feel impossible to properly budget. These tips are key to pulling it off.

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There are plenty of reasons people like salaried jobs: The pay is predictable, a sick day won't derail your income, and the financial security it provides can be the cornerstone of accumulating wealth. But as people move toward gig work, freelancing, and entrepreneurship, experts say your budget has to be as flexible as your invoices.

Acquania Escarne, lead wealth strategist at The Purpose of Money, and Paco de Leon of The Hell Yeah Group, a financial firm for creatives, say that folks on a fluctuating income should focus on these three money matters: realistic goals, emergencies, and taxes.

Keep Ambitions High, But Your Budget Realistic

It's tough to budget consistently when your income is a moving target, but Escarne says it's best to take an average income from the last three months and create a budget around that round figure. She teaches budding entrepreneurs to "add up essential expenses and make this the minimum amount of money that you need to live. In the beginning, the minimum you need to live could be your monthly revenue goal, but increase your goal as your business grows."

Rather than focusing on exact numbers, it's best to budget around percentages. According to Escarne, setting aside 10 percent for retirement, investments, and emergency savings is the bare minimum.

De Leon seconds this practice. "When you work for yourself, knowing how much you need to earn each month in order to afford your personal expenses, meet debt obligations, and save for the future is the first step in having a strategy and setting an income goal," she says. "A realistic budget can help with that flexibility, but it also helps you manufacture structure and consistency. Paying yourself based on a realistic budget can help you feel like your personal income is consistent even when your business income is not."

Instead of a Rainy Day Fund, You Need a Runway

Salaried employees are typically advised to save three to six months of living expenses for a safety net in case of layoffs or medical emergencies. That amount can be awfully hard to spare when your pay is volatile. De Leon says that freelancers aren't planning for a hypothetical rainy day far off into the future; instead, they're planning for right now. She calls this a "runway."

"If you stop working today, your 'runway' is how much time you have until you run out of money," de Leon explains. "It's how many months you'd be able to afford without having any income. Work toward building at least a few months of runway. With a solid runway, a lifestyle of freelancing and irregular income can feel less scary. It can also give you the opportunity to be more particular about the types of work you accept."

Not having a runway, like not having an emergency fund, pretty much spells disaster. It likely means accepting lower-paying jobs more often, which can keep long-term financial stability at bay. It's a vicious cycle; gig workers are then more vulnerable to having minor mishaps—such as a busted tire for a ride-share driver, or a broken computer for a writer—turn into a full-blown financial emergency. Keeping a strong runway smooths the turbulence for the long haul and gives the self-employed the best chance to grow in their careers.

Plan for Uncle Sam

When you get a W2, your employer is responsible for withholding your taxes. Because that money never shows up in your bank account, the entire process of not spending it is rather foolproof. Aspiring impresarios, however, don't have that luxury. When you're self-employed, you have to do all the work, including telling the government how much money you made, how much you spent, and how much you plan to fork over in income taxes.

It's important to remember that, depending on what you do, you may be able to claim many tax write-offs for your small business. Think paintbrushes and web-hosting fees for a visual artist with an e-commerce store, or mileage and gas for a real estate agent. These small daily expenses can add up to sizable sums, and they can minimize how much you and your company owe in taxes. "Track all your expenses, so you can deduct the most," urges Escarne. "But don't forget to save around 30 percent of your revenue to pay Uncle Sam."

De Leone says that forgetting this tax piece can be the difference between a great hourly rate and undercharging. "In my years talking to and working with freelancers, I've witnessed way too many of them charging an unsustainable price because they only think about what they need to earn personally," she explains. "Profit, business overhead, and taxes all often get overlooked. For example, let's take a look at the tax piece: Let's say you pay yourself $2000 for your personal pay each month. Don't forget to account for estimates on the taxes you need to pay for those earnings."

Using Escarne's estimate of 30 percent, you'd need to earn $600 more for a total of $2600 to pay yourself the $2000 and account for taxes on those earnings. It's best to work with an accountant to calculate your tax rate—and to build this unavoidable financial obligation into your budget sooner rather than later.

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