Overview
A growing number of people are opting to work as freelancers or gig workers. More broadly, workers are experiencing lower levels of job security than ever before, with a gradual economy-wide shift away from full-time, permanent, pensioned employment with benefits and toward contract work, freelance work, and gig work. These modes of work come with fluctuating income, making budgeting more challenging. In this article, we will explore five methods to budget on a variable income as a freelancer or gig worker.
Method #1: List All Your Income Sources
In an Excel spreadsheet, list all your income sources for a given month. These may include clients you work with as a freelancer or gig work you do, such as driving for Uber. Once you have all sources of income listed, you can calculate their relative importance. Which income sources have the highest return on your investment of effort? You may wish to prioritize your most reliable and highest-paying clients and/or gigs. Effective time management and budgeting are only possible when you have a clear understanding of where your money is coming from throughout the month.
Method #2: Calculate Your Average Monthly Income
The method is simple: add up your total income over a given period, say, twelve months, and divide the total by the number of months to arrive at your average monthly income. Knowing your average monthly income is important for establishing a basic budget. It will allow you to know how much you can afford in terms of your housing, groceries, gasoline, and all other expenses and how much room you may have for saving and debt repayment on a typical month.
However, establishing your average monthly income is only the beginning of an effective budgeting process, due to the variability in income you may experience throughout the year.
Method #3: Create a Budget for Low-Earning Months
Due to the inevitable ups and downs, it’s important to design a budget specifically for low-earning months. During such months, you may wish to prioritize fixed expenses and minimize your pleasure spending. Focus on financial obligations you cannot do without, such as housing, car insurance payments, and so on. Minimize dining out or entertainment during these months.
Method #4: Optimize Savings During High-Earning Months
For high-earning months, it’s important to design a budget that makes the most of your extra income. You may consider a budgeting structure like the 50/30/20 budget, wherein you spend 50% of your income on needs, 30% on wants, and 20% on saving and debt repayment. Save as much as possible during your high-earning months and start building an emergency fund as well as putting money in your TFSA and/or your RRSP. This will allow you to have a buffer of safety and security during stormy economic times in your life. For example, $100 saved per week would amount to $5,200 saved in a year’s time, which can be enough to cover significant expenses such as car repairs without too much stress. Having savings and/or an emergency fund will likely foster peace of mind as you know you can take care of unexpected expenses.
Method #5: Focus on Fixed Expenses
While it’s tempting to engage in excessive pleasure spending, buy expensive coffee at large coffee chains, have unused subscriptions, or have a premium gym membership, it’s important to focus on fixed expenses. These will likely include housing, car insurance, home insurance, and so on. Taking care of fixed expenses first and foremost will allow you to use the rest of your funds more judiciously. Instead of blowing your income on an expensive gadget you don’t need, you may prioritize important expenses like housing and then judiciously use leftover funds for savings, investments, and/or debt repayment, which will result in greater gratification over the long term than the brief pleasure of an impulsive purchase in the moment. In general, it’s a good idea to prioritize long-term goals over short-term gratification.
Conclusion
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