How To Budget On An Irregular Income: A Freelancer’s Guide

Being a freelancer is pretty awesome, right? Flexible hours, the ability to choose from a wide variety of employers, and the lack of a need to travel to work is pretty cool. That, plus you can work in your PJs if you want. Working the gig economy is great!


Well, hold on a second.


The freelance economy comes with its own set of challenges too! These include budgeting on an irregular income, saving for the inevitable retirement, and of course, paying for your income taxes.


If you’re considering freelancing or have already started to freelance, it’s important that you get a handle on how to balance spending and saving so you can meet both short-term obligations and long-term goals. Let’s take a look at what a freelancer needs to do to budget on an irregular income.


Create a budget based on your average net income


If you have been working freelance for a year or two, this should be a snap. Calculate your average net income (after tax), divide the result by 12, and use this as your baseline for your monthly budget. If you’re new to the freelance gig, you’ll need to revisit your average net income regularly to help account for the lean months and the lucrative months.


Once this is done, calculate your monthly expenses and compare it to your income. If the difference is in the red, you may want to cut some expenses or find an extra source of income to help balance the budget.


Budget using three bank savings accounts


For the next step, you’ll need three linked bank accounts: two high-interest savings accounts and a checking account.


Use the first savings account as your holding account. Deposit all your income from all sources in this account. You will be using this account to pay yourself the monthly budget amount you calculated earlier. Remember to stick to your budget: the money in this savings account needs to last for lean months too.


The second account will handle what you need to pay the government. Income taxes and other contributions should be paid using this account, so set aside an amount to be deposited here, and make sure you save as you earn. Calculate your average tax rate and make sure t move that amount from every deposit to your tax account.


Your third account is for handling expenses. Move your monthly budgeted expenses from your holding account to your checking account and use this to pay for your expenses such as housing, utility, food, credit cards, transportation, and other expenses.


Build an emergency savings fund and a retirement fund


An irregular income is not an excuse not to save for the future. Check with your bank or with a financial advisor on what options are available in your country for retirement plans.


Make sure that you start saving for an emergency fund as well. In the gig economy, falling ill or losing a contract can happen and can cause you to go in the red very quickly.


Building a realistic budget on an irregular income takes work and practice, so make sure you always evaluate and adjust.


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