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Are you among the millions of Americans who earn a living by freelancing, contracting, or running a few 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.
They may run an Etsy shop while bartending on weekends. Or, they might operate a solo business as a photographer, graphic designer, writer or pastry chef. Maybe they work seasonally as a sailing instructor, street performer or bike repairer.
If you’re part of this working world, there’s a good chance you rejoice in the amount of freedom you have compared to your traditionally employed counterparts. But at the same time, your paychecks are often more sporadic. And that, undoubtedly, can create extra challenges when it comes to budgeting.
To help you stay on track with your finances, here’s a look at five strategies to successfully live on irregular income.
Keep overhead low
For starters, you need to get a handle on your monthly necessities. That includes the bare minimum of money it takes to pay your rent or mortgage, groceries, car payment and utilities.
Of course the goal is to make a lot more than the minimum, but keeping that number in mind will help you budget responsibly.
You can keep your overhead costs down by doing a number of different things, such as
- living with roommates
- driving a used car, or
- buying store-brand groceries instead of top dollar, name-brand.
On the contrary, some might argue having a pricier car payment or mortgage motivates self-starters to work harder to earn the money they need. And in some instances, that may be true.
Either way, only you know if you’re motivated or stressed by committing to a higher amount.
Stash extra cash when you can
Depending on the industry, you may feel subject to periods of feast or famine. One month you might collect a big, juicy check for a lucrative consulting project. The next month could be a lot leaner once that project wraps up.
During the summer, a lifeguard can rake in the dough but earn very little the rest of the year. During periods of feasting, it can be tempting to splurge on a new laptop or weekend travel.
However, it’s always a good idea to set aside some of that extra money to prepare for times when work slows down.
Plus, it’s nice to have a cash cushion when you want to take some time off. Unlike employees who get paid vacation or sick leave, your time off comes out of your own pocket.
Stay on top of invoices
Sometimes erratic cash flow is unavoidable. Authors, for instance, may get a four, five, or six figure book advance check and have to live off it 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 don’t be afraid to 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 Solo 401(k).
Depending on your situation, you may want to consider buying life insurance, disability insurance, or errors and omission insurance.
Plan for tax time
When it comes to your taxes, there are a variety of business expenses you can deduct. For instance, the home office deduction allows you to deduct expenses for the business use of your home. Equipment, like computer software and any other supplies that are necessary to perform your work, are often tax deductible too.
But, unlike traditional employees, you more than likely haven’t had taxes withheld from the income you collected from clients or customers. That means you could be in for a nasty surprise come tax time if you haven’t set aside enough money to cover the tax liability.
One way to avoid this problem is to set aside a percentage of every paycheck in a separate account. Then remember to pay quarterly estimated taxes to the IRS so you aren’t left with a large bill when you file your tax return.
Click here for more tax tips for the self-employed.