How to Budget on an Irregular Income: A Freelancer’s Survival Guide
As a freelance writer, I have a good idea of how much money I’ll bring in every month -- but my estimate is rarely perfect.
Sometimes I don’t get as many assignments as I had hoped for, and sometimes clients are slow to pay invoices. There are also months where I earn much more than I had expected, and my bank account is temporarily flush with cash.
I catalog assignments completed and money earned publicly, through monthly income reports at The Write Life. But what I don’t often dig into is how I manage to budget on an irregular income.
I’ve been freelancing since 2012, so I know a lot about how to handle the irregular cash flow that comes with the freelance life.
Instead of getting a paycheck every two weeks, some clients pay every month, some clients pay every week and some clients pay 30 days after an article is published -- which can be three or four months from the date of article submission!
Here are the tips I’ve developed to help me survive life on an irregular income.
1. Know Your Monthly Overhead Cost
The most important thing you can do as a freelancer -- or as any person with an irregular income -- is to know your monthly personal overhead cost.
This is the money it takes to pay your rent, pay your bills and buy essential items like food and medication. If you have other essential costs such as car payments or daycare, include them in your overhead as well. Leave out money for clothes, entertainment and other non-essentials.
If you have irregular income, you must always bring in more than your monthly overhead cost. Every single month, even the lean ones.
If you’re not bringing in more than your monthly overhead, you need to focus on earning more money -- and luckily you’re on the right site for that!
2. Know When You Usually Get Paid
Now that you know your monthly overhead cost, it’s time to figure out when you usually get paid.
If you’ve been working with freelance clients for a while, you’ve probably figured out their payment patterns. I have one client who pays me every week, and the rest of my clients tend to pay around the 15th of the month or the end of the month.
Even though the amounts in these payments vary, I can expect a little bit of money to come in every week and two big chunks of money to arrive around the 15th and the 30th.
Knowing when you usually get paid helps you plan how to stretch your money until your next big payday, which brings me to my next tip.
3. Know How Long Your Income Needs to Last
I have absolutely made the mistake of getting a big freelance check and spending it right away. Now, I tell myself “this money has to last until the 15th of next month,” or whenever my next big freelance payday is.
Knowing how long my income needs to last keeps me from spending it all at once, and it also helps me to make sure I’ve always got that $1,500 that I’ll need to spend on rent, bills and the rest of my monthly overhead.
Here’s an example of this type of income planning. When I look at my bank account today, I think: “OK, right now I have $941.50 in my account, and I’ve already paid my monthly bills, but $675 of that needs to go towards rent. So that means I really have $266.50.
“I should get another $1,200 by the 30th, and I’ll need to put some of that towards taxes, debt and savings, which will give me roughly $341.50 left to start the next month, and that -- in addition to the small payment I’ll receive each week -- needs to last until the 15th.”
Notice how I mentioned taxes, debt and savings? That’s an essential part of my budget, so we’ll look at those three categories next.
4. Pay Yourself (and Your Taxes) First
“Pay yourself first” is one of those “eat right and exercise” sayings that sounds simple in theory but is really hard to put into practice. However, it has completely changed the way I interact with my freelance budget -- for the better.
If you are a freelancer, you’re probably responsible for some kind of freelance taxes, including quarterly estimated tax payments.
My CPA recommended I set aside 20% of my income for freelance taxes, so that’s exactly what I do. At the end of every week, I take 20% of the checks that have arrived that week and put them into a sub-savings account labeled “taxes.”
I also put 20% of my income towards debt repayment. I’m lucky that I’m earning enough to be able to put a full 20% of my income towards debt, and if you’re earning less you might not be able to put as much aside.
But making a plan to get out of debt is an important part of your financial health, so figure out what works for you.
Lastly, I put 10% of my income into a savings account. This is the best thing I’ve done for myself as a freelancer.
Having that savings buffer helps me feel more secure about my irregular income. If something unexpected happens, whether I lose a big client or need to replace my laptop, I’ll have money I can spend.
Those are my tips for budgeting with an irregular income. What are yours? Everybody budgets a little bit differently, so let’s share our tips and learn more about how to survive -- and thrive -- with irregular paychecks.
Your Turn: How do you plan ahead when your paychecks aren’t predictable? Share your tips and ask questions!
Nicole Dieker is a senior editor at The Billfold, and her work has also appeared in The Toast, The Write Life, Boing Boing and Popular Science.