Are you among the millions of Americans who piece together a living by freelancing, contracting, or running side hustles?
The so-called “gig economy” has shed light on a growing class of workers who don’t collect a steady, guaranteed paycheck from a single employer.
Perhaps they run an Etsy shop while bartending on weekends. They might operate a solo business hiring themselves out as a photographer or graphic designer or writer or pastry chef. Maybe they work seasonally as a sailing instructor or street performer or bike repairperson.
These independent workers may have more autonomy than their traditionally employed counterparts, but their paychecks are often more sporadic, which can create extra challenges for budgeting.
Here’s a look at 5 strategies to live on irregular income.
Keep overhead low
Independent workers need to get a handle on their monthly necessities: the bare minimum of money they need to make to pay the rent or mortgage, groceries, car payment, and utility costs.
The hope is that they’ll make a lot more than the minimum, but keeping this number in mind should help motivate them to reach that threshold.
Maintaining low overhead by living with roommates, driving a used car, or buying store-brand groceries means there’s less chance of having to pay for these necessities on credit if work slows down.
Conversely, some might argue that having a pricier car payment or mortgage motivates self-starters to hustle to earn that money. Only you know if you’re the type of person who would be motivated or stressed by setting a higher goal.
Stash extra cash when you can
Depending on the industry, independent workers can feel subject to periods of feast or famine. One month they might collect a big, juicy check for a lucrative consulting project, but the next month could be a lot leaner once that project wraps up.
During the summer, a lifeguard might be raking in the dough but earn very little the rest of the year. During periods of feasting, it might be tempting to splurge on a new laptop or weekend travel.
But it’s a good idea to set aside some of that money to cover living expenses when work slows down.
The other reason to maintain a cash cushion is that unlike employees who get paid vacation or sick leave, most independent workers don’t get paid when they don’t work.
Another approach to this, particularly with seasonal work, is to divide the money you earn by 12 and only “pay yourself” one twelfth of that money while you leave the rest in a savings account.
Stay on top of invoices
Sometimes erratic cash flow is unavoidable. Authors, for instance, may get a four, five, or even six figure book advance check and have to sustain themselves on that until they start collecting royalties or land another gig.
However, sometimes the lag time between checks is due to a lost invoice or a misunderstanding about payment terms. Make sure you and your client or customers agree to clear payment terms and follow up promptly if payment is late.
Create the financial safeguards you need
Employees with a steady paycheck often have a retirement plan, health insurance, and other safeguards available through their employer.
Most independent workers do not. This underscores the importance of buying your own health insurance and setting up a retirement account such as a SEP IRA or 401(k).
Depending on your situation, you might also want to consider buying life insurance, disability insurance, or errors and omission insurance.
Plan for tax time
But many of these workers don’t have taxes withheld from the income collected from their clients or customers, as regular staffers do. So they could be in for a nasty surprise come tax time if they haven’t set aside enough money to cover their tax liability.
One way to avoid this problem is to set aside a percentage of every paycheck in a separate account and pay quarterly estimated taxes to the IRS.
Here’s a look at other tax tips for the self-employed.
Independent workers, tell us what strategies have worked for you! How have you dealt with irregular income?