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Navigating an Irregular Income: Money Management for Freelancers

Personal Finance
Woman freelancer working on laptop while sitting at the window in a coffee shop: irregular income

Not everyone in America works a traditional 9-to-5 job. More people are turning to freelancing, self-employment and the so-called gig economy to either supplement their income or as a sole means of earning a living.

More than 60 million Americans now freelance either full- or part-time, according to the Freelancers Union. While working for yourself can provide a lot of freedom and flexibility, it also can mean an irregular income — which makes it difficult to budget.

If you haven't already learned to navigate the financial fluctuations that come with being self-employed, here are some tips that could help you better manage your monthly finances.

Estimate & Budget

Although this may seem somewhat obvious, you'll need to know your input (income) and your output (expenses) every month to budget accurately. The first part of that equation is probably the most important, but when you're self-employed, no two months are ever the same.

If you've been freelancing for a while, you likely have several months of earnings you can review to see how much you've made each month. Once you have this information, determine your monthly average income over that period — or the amount you earned during your lowest-earning month — and consider using that number as the baseline for your budget. For example, your monthly average could be $4,000 a month, while your lowest-earning month could be $3,000.

Once you figure out that number, look at your monthly expenses — including housing, utilities, discretionary spending and long-term goals like saving for retirement or buying a house — and figure out what's feasible. Track all this information on a spreadsheet or in a notebook — so you'll have something to reference each month.

If your expenses are higher than your monthly average or your lowest month, you may need to cut back in certain areas or figure out a way to earn more. But since your income isn't stable, it may make more sense to keep your expenses predictable — so you have more control over your finances and can meet your monthly obligations.

Open Separate Bank Accounts

Organizing your money when you're self-employed can be vital, both for tax purposes and for your sanity. You should keep your business income and expenses separate from your personal income and expenses.

One way to do this is to open a separate business checking account, where you'll deposit all the income you earn from clients and withdraw money to pay for business expenses like a computer, office supplies, transportation and relevant monthly subscriptions. This separation also will help reduce what you owe come tax time because it'll be easier to see what business deductions you can claim to lower your taxable income.

Pay Yourself a Salary

Once you've estimated your monthly income, calculated your monthly expenses and opened a separate bank account for your business, you can pay yourself a salary. Pick a specific day each month and deposit a set amount from your business account into your personal checking account to cover your monthly expenses and discretionary spending. (You should pay for all personal and non-business-related expenses out of your personal checking account.)

Although your income will fluctuate, having a monthly salary figure in mind may encourage you to hustle more when work is slow. It'll also help give you structure, keep you disciplined and might reduce the temptation to withdraw more from your business account than you actually need each month.

Build Your Emergency Fund

When you work for yourself, preparing for a rainy day is a must. Any freelancer can tell you about the feast-or-famine cycle: For months you may be inundated with work and then several months later work will come to such a halt that you may begin to second-guess your decision to work for yourself.

Unfortunately, this is part of the normal up-and-down cycle of freelancing. Still, you can better prepare for the lean times by saving aggressively — or, at the very least, consistently — when times are good.

Different financial experts will offer different advice, but an emergency fund that totals at least six to twelve months of expenses is likely a good place to start. That way, when the work dries up — and, in freelancing, it inevitably will — you don't descend into a full-on financial panic.

Set Yourself Up for Financial Success

Even with the irregular income that comes with freelancing, being self-employed and having the freedom to set your own hours and make as much money as your time and talent allow is a huge blessing. But freelancing can turn into a financial nightmare if you don't take the time to track your income and expenses, create a workable budget and save some money each month.

If you are tired of clocking in and out of a traditional job, considering these steps may help make your chosen career path more sustainable, as well as help you better ride the financial waves that come with being self-employed.

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Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.