Managing money can be difficult even with a regular pay cheque coming in. Between saving for the future, covering monthly expenses and having fun, there’s no shortage of things to spend money on. When your income is irregular and varying, cash flow may be booming for a few of months then suddenly running dry right when an unexpected expense pops up. This can make organizing your money a confusing and daunting task that gets pushed to the bottom of your perpetual to-do list. Setting up an easy-to-stick-to and realistic system for managing your finances can protect you for the long haul and ease those money worries to help you sleep at night.
Here are some tips to smooth out irregular income:
1) Keep personal and business finances separate
Keeping track of business related expenses will help you at tax time as many of those expenses are likely deductible. It was also help you understand what you need to live on personally versus what you need to spend to generate business income. This will prevent you from asking "where does all my money go?" and will make you feel more in control of your finances.
2) Ensure you spend less than you earn and invest the difference
First, create a list of your cash inflows and outflows. If you need $3,000 per month to meet basic living expenses, yet average $5,000 per month in earnings, put the $2,000 excess amount aside for future use for an emergency fund, retirement, vacation, etc. To help you make this list, use our FREE budgeting template and other tips found in this blog post:
3) Create an emergency fund of 3-6 months’ pay
Only use this money for emergencies (i.e. if you have no income one month yet still need to pay rent and buy groceries).
4) Set aside and invest money for retirement
Use the power of compounding over time to grow your wealth; the sooner you start the better. Aim to save at least 10% of your income.
5) Calculate how much you will need to pay in taxes and set up a separate savings account to cover it.
For example, if your tax bracket is 30% you should direct 30% of all your income directly into the separate savings account so you can pay your taxes when due.
Although creating a system for managing your finances as a freelancer sounds daunting, you will thank yourself later on when you avoid a financial surprise that could have left you reeling.
For more tips on getting in control of your finances with an irregular income, watch this week’s episode of The Wealthy Life Sunday, December 17 at 6:30pm on CHEK!