Today, we’re diving headfirst into a topic that hits close to home for many of us: dealing with inconsistent income.
As thrilling as the freelancer life can be, it’s no secret that financial uncertainty keeps many people from taking the leap into freelancing.
Let’s take a look at how to manage the inconsistencies.
Figure out your monthly business expenses
You need to have a clear and honest picture of what your monthly business expenses are. This includes equipment (make sure to save monthly for big-ticket items such as a computer replacement), wifi, liability insurance, accountant fees, etc.
Figure out your personal monthly expenses + yearly salary needed
Let’s say that your monthly business expenses are $1000, and you need to contribute $5000 every month in order to pay your bills. That means that you need to make $6000 x 12 ($72,000 after taxes) over the course of the year in order to pay your bills.
This is how much you need to contribute after taxes from your freelancing monthly in order to pay the bills.
Look at your yearly salary
If you’re not making the $72k after taxes, you have some brainstorming to do.
Now, here’s where the challenge comes in. You need $6k every month (1k for business expenses and $5k to cover your bills. Some months you may make more than that, some you may make less.
Every month, transfer the $5k from your business account into your personal account. If you make more than $5k that month, keep the excess in your business account. This will act as a buffer for the future when you have months where you may not bring in $5k.
If you incorporate, you’ll pay yourself, and this will be done automatically.
Buffers, Emergency Funds + Investments
If this makes sense to you, but you’re unsure how much to “buffer” and how you can use some of that money for investments (please invest!) and extra play money, read on.
I factor in investment money every month. Then once a year, after I submit taxes and know for sure how much I owe, I then invest more at the end of the year, depending on how I did, and after I submit my taxes.
As for extra play money (because remember, up until this point, you’ve just paid yourself the minimum required to pay your bills), my advice, and what I like to do, is save up a certain amount of money in your business account first (3-6 months of expenses + monthly payments is likely a good minimum), and then feel free to pay yourself out some of that extra. I also like to use some extra to put back into my business, including education.
I know that inconsistent income can really be unsettling, but if you implement the plan above, you have enough time to be proactive and adjust.