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Irregular Income
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Managing a Budget When You Have Irregular Income

The freelance market is growing, and by 2027 more than half the US workforce will earn a living on a freelance basis, according to a recent survey from Upwork and Freelance Union. While successful freelancers are nimble project managers and skilled taskmasters, making a functional financial life out of the collection of projects often becomes an elusive goal.

I should know—I’ve freelanced for 17 of the past 26 years. Clients come and go, as do their budgets. While I find financial security in freelancing, it does require tinkering and management skills. While my bills have predictable due dates, my freelance income shows up sporadically—and is sometimes late. Holiday schedules, changes in accounts payable processes, or a client-side manager forgetting to forward an invoice along can throw wrinkles into a payment schedule. Here are some hacks for balancing an adult financial life as a freelancer.

Get to Know Your Cash Flow

It’s possible to earn a handsome living as a freelancer, yet struggle throughout periods of the year due to the timing of paychecks. Work volume can vary from month to month or quarter to quarter, meaning income doesn’t trickle in steadily as with a full-time job. The dirty secret of freelance is that cash flow can present a challenge. If you can’t manage your cash flow, you can’t do grownup things like pay off debt, save for goals, or invest for the future.

If you’re going to make a living as a predominantly freelance professional, you need to take a hard look at your income and your expenses. This is true in any budgeting exercise, but when you freelance what’s different is that you also need to look at the due dates of each expense each month and the expected dates of income arriving, which you can’t always predict. You want to make sure you can always cover the basics on time—rent or mortgage, car payment, utilities, food, key debt payments—for your personal sanity and credit score.

Then you need to look at your “variable due date” costs – an IRA that you contribute to at some point(s) in a year, the taxes you will likely pay quarterly, bills (think medical) where you can wait a while to pay or pay incrementally.   Whenever I take on a new project, I read its associated contract closely or ask my contact what the pay timeframe is—and I note that on my project list.

While in my lifetime I’ve seen more and more technology platforms and individual clients pay electronically—and in one case, half up front and the other half on project completion—many freelancers are still paid via checks in the mail. Boarding a plane for a rare multi-week vacation or cross-country family emergency and not knowing if or when pay is showing up can create stress. If your clients mail checks, enroll in the US Post Office’s “Informed Delivery” service, which sends daily scans of what’s in your mail. It’s easier to whip out that credit card or dip into savings if you know a long-awaited check has arrived.

Suddenly Freelance?

A rule of thumb for those leaving a full-time job to go freelance in their field is that you will need to earn 20% to 30% more than you did on staff in order to cover the benefits (health insurance, 401k matching) your employer likely provided and the extra costs (your portion of self-employment tax, no more paid holidays, insurance, office supplies) you now incur.

“If you once earned $60,000, you’d need to freelance $72,000 to $78,000”

Some also advise the 30% uptick because you will need to spend not-technically-paid time on “overhead” – pitching or networking to get projects, signing contracts, maintaining your own website or digital portfolio so you’re visible to prospective hires, and occasionally absorbing a client who doesn’t pay. That means if you once earned $60,000, you’d need to freelance $72,000 to $78,000.

This is not a hard and fast rule. If you’re partnered or under 26 you may qualify as a dependent or “plus one” on someone else’s health insurance, meaning that cost—which in 2018 averaged about $5100 for a single person on the open market, before deductibles—is softened by the likely lower “add-on” price you pay on someone else’s policy.

Working from home may mean you reduce commuting expenses and eliminate a dry cleaning bill—although your electric bill and pizza delivery costs may rise. And you have the option to invest in the self-employed person’s equivalent of an employer-matching savings plan—although if you invest in a SEP IRA or SIMPLE IRA you pay both the employer and employee portion of this investment, without an external match because you’re now the employer making the match.

Design a Ramp-Up Period

Freelancers are advised to keep a fatter savings cushion than rank-and-file full-timers. That can come in handy when launching a freelance career or building one. A Baby Boomer I know (full disclosure: my husband) who was laid off in 2016 used his substantial savings and paid himself a basic payment each month to cover regular expenses while he built up his freelance clientele—and two years into it, he no longer has to dip into savings and is living la vida freelance like me.

But decades of savings are not generally the launch pad for freelance if you’re young. One Millennial I know recently left a full-time job to freelance. Her lease with roommates was up for renewal, so she opted out of it and decided to house-sit, pet sit, or bunk with family (eliminating her rent expense) while she ramps up business and watches to see if her favorite startup client secures funding to bring her on full-time.

Get an Anchor Gig

“Anchor gigs” are what freelancers call their steady clients. I couldn’t freelance without the anchor gig I secured in 2004—and that I maintain to this day. By working for a financial news service that pays me electronically and monthly as an on-demand freelance stringer (meaning, I can earn as much as I can show up to do), I can predict the regular income I use to pay my mortgage, car expenses, gym membership, groceries, utilities and so forth. The work is sometimes repetitive, but the security or “base layer” it funds (and the credit score it helps me keep) is worth it. My sporadic gigs pay for quarterly taxes, investing, vacations, or discretionary purchases I can wait to make.

“At some point you need to assess if you’re fetching the hourly rate you need from your projects.”

Anchor gigs can provide financial security—but they can also create opportunity costs for freelancers in that the tradeoff for financial security may be a pay rate that doesn’t rise along with your cost of living. In a world where you have a finite number of work hours, at some point you need to assess if you’re fetching the hourly rate you need from your projects.

If you’re new to freelancing, “optimizing” your client list may not yet be a priority—just having a client list is. Note that not all “anchor gigs” need to be professional bull’s-eyes. A retail job, a side hustle, a restaurant shift—any of these jobs can provide predictable income and sanity or, depending on how many hours you work, benefits.

Don’t Forget to Save for Taxes

If you’re self-employed, you will pay federal tax on your income and likely also state and city taxes. Unlike a pay stub, checks for freelance work don’t trim funds for federal or local taxes—so you will have to. Many cities and states also require you to pay for annual business permits and licenses, depending on the type of work you do.Those new to freelance often get a rude awakening about just how much they need to set aside for taxes. This IRS chart for 2018 withholding may provide a model for what to set aside, though everyone’s tax returns vary.

A perk: As a freelancer, many expenses may become deductible—including a percentage of your rent or mortgage if you maintain a home office, a portion of utilities, memberships in trade or professional organizations, continuing education or coaching, etc. Hiring a CPA or tax professional to help you “set up” a system for tracking and organizing expenses is money well spent—versus owing an unexpected bill to the IRS.

If you’re capable of saving a sizable portion of your income as set-aside for taxes, you can model at the end of a given year how much you can invest in your self-employed IRA to reduce your tax bill. Freelance is rewarding—but to make a life you want to live from it, learning to manage money that ebbs and flows is key.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.