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Question
Since I started freelancing, dealing with irregular income has been a huge deal. Some months are great, others slow. How can I manage this unpredictable income effectively? What’s the best way to budget when my income varies from month to month?
Answer
Let me start by saying you are not in this alone. This is a common challenge many freelancers have faced and continue to face. The good news is that you can still build a sustainable lifestyle if you can commit to acting on some of the steps shared in this letter.
Build an Emergency Fund
An emergency fund is crucial for freelancers. Aim to save at least three to six months’ worth of living expenses. This will act as a buffer during slow months and give you peace of mind knowing you have a safety net to fall back on during the not so great months.
Understanding Your Income Patterns
Have you ever tried to study how and when money comes in. It looks so unpredictable most likely because you have not taken time to study your market, the seasons your services are needed the most and so on. It is essential to understand your income patterns. If you have not started, it is not too late. Track your earnings for several months to identify any trends. For example, how much did you earn monthly in the past 6 months, sum that up and divide by 6. This will give you a clearer picture of your average monthly income and help you anticipate slow and peak periods. Don’t just identify the trends but try to research them to know the underlying factors behind them.
Create a Budget
Create a baseline budget based on your minimum monthly expenses. Include essentials like rent, utilities, groceries, and transportation. Knowing your baseline expenses will help you determine the minimum amount you need to earn each month to cover your necessities. This in itself will motivate you to take as many jobs as necessary to cover the expenses.
Save Aggressively During High-Income Months
During months when your income exceeds your baseline expenses, save a portion of the excess. This can be added to your emergency fund or invested in stocks, Exchange Traded Funds or any investment option of your choice. This way, you create a financial cushion that smooths out the highs and lows. This is not the time to increase your spending except it’s necessary. You should consider increasing your budget only when your average income increases significantly.
Separate Personal and Business Finances
Maintain separate accounts for your personal and business finances. This very simple but effective practice not only simplifies tax preparation but also provides a clearer view of your business cash flow. Pay yourself a consistent salary from your business account, which can help stabilise your personal budget.
Pay Bills Annually, If Possible
Paying bills annually, when possible, is often a smart strategy for managing irregular income. This is simply because annual payments sometimes come with discounts, saving you money in the long run. Additionally, it reduces the number of monthly expenses you need to track and worry about, and provides more stability and predictability in your budgeting. This way, you can better plan your finances around your income fluctuations, ensuring essential costs are covered without constant monthly stress.
Plan for Taxes
As a freelancer, you need to manage your own taxes, which can be a significant expense. To make this easy on you, set aside a percentage of your income each month for taxes. You can also consult with a tax professional to determine the appropriate amount to withhold and stay compliant with tax regulations. Bear in mind that this service comes with an added cost.
Leverage Financial Tools
Use budgeting tools and apps to monitor your income and expenses. These tools can provide insights into your spending patterns, and help you track your progress.
Diversify Your Income Streams
If possible, diversify your income streams to reduce reliance on a single source of income. Consider taking on multiple clients, exploring different freelance platforms, or offering various services. This can provide more stability and mitigate the impact of losing a client or experiencing a slow period in.
No doubt, freelancing requires flexibility and adaptability but you have got this! Regularly review your budget to ensure it reflects your current financial situation and make adjustments as needed to accommodate changes in your income or expenses. Remember, consistency and proactive planning are key to successfully navigating the ups and downs of freelancing. Watch a recap of the last webinar on Practical steps to freelancing with Adeife Adeoye by joining our community here.
At MoneyAfrica, we encourage individuals in different phases of life to take charge of their finances. If you have any questions or concerns about your investments or you would like to discuss your portfolio strategy further, join our community by clicking here.
See you soon!
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