Ask Chuck: How to Budget With Inconsistent Income
I am part of the ‘Gig Economy’ and work full-time as a freelance graphic designer. Some months I am slammed with work and make a great amount of money. But then other months are really slim. I’ve found it’s really difficult to budget for these major ups and downs – I end up relying on my credit cards during the slim months and then a lot of my income during the plentiful months goes towards paying off debt. How can I make this work better?”
Needing a Gig Budget
Dear Gig Budget,
Planning is a necessary part of financial health for everyone, but especially the freelancer. You have more flexibility than traditional workers, but you also have different challenges brought about by the uncertainty of your income.
According to a 2017 report from Intuit, the contingent workforce or non-traditional segment makes up 36% of the U.S. workforce today, compared to 17% just 25 years ago. Gig workers, also known as on-demand workers, are part of that group.
So how do you budget on an inconsistent income?
Set Your Lifestyle
Careful planning will be required to make it work. Fix your lifestyle according to the income earned during the lean months, so you can avoid going into debt or getting in a financial bind between periods when you are billing.
Don’t get caught up in the comparison trap! Many gig workers and freelancers have the flexibility to work from home, so take advantage of the savings that offers you. It may be tempting to work in an Instagrammable coffee shop or open-concept co-op office, but instead of spending $5 on a latte every morning or paying monthly fees to have an office space, maximize your home office to be conducive to your work. You’ll save money by eating at home, using less gas, and making your own coffee.
Build a Budget
This is an essential part of everyone’s life, but especially the gig worker. The first step is to calculate your monthly base income. There are two basic ways to do this and you may want to use a combination of both:
- Estimate your monthly income by dividing your total income from the previous year or two by 12. For a more conservative approach, look at your past year and write down how much you made each month. Then remove the month that you made the most money. Add the remaining 11 months and divide by 11. Set that as your monthly base income for your budget.
- Again, looking over the past year or two, find the month you made the least amount of money and use it as your monthly base income. It can be tempting to set your budget on your steady or high-income months, but this more conservative approach will provide the margin for you to save, give, and pay off debt when you have extra income.
Step two is to calculate your monthly expenses. More than traditional workers, freelancers need to have a running total of their fixed monthly living expenses: this includes mortgage/rent, insurance, etc. Then add your monthly variable expenses – things like groceries, utilities, taxes, and tithe. These are your monthly living expenses.
Once that number is set, add in the “extras” – buying new clothes, entertainment costs, etc. Crown has a helpful worksheet that you can utilize to write down all your monthly expenses.
Once you have your monthly expenses set, keep track of how much you’re spending for several months. No two months are exactly the same so keep track of how much you’re spending. Record your expenses by writing them down in a worksheet (this one is already set up for you) or connecting a budgeting app to your bank account.
These two steps are the “nuts and bolts” of your budget. Crown’s Easy Guide to a Budget You Love walks you through all these steps in more detail with extra help and tips and includes sheets you can fill out online or by hand. It’s free to download and will help you stay on track!
Be patient and disciplined during this time, giving thanks for all work and income. Ask God for the ability to stretch during the lean times and save during the rich ones.
Remember that your budget is meant to flex as your income and expenses change over time. Once you’ve followed your budget for some time, you’ll be able to identify the areas where you need to adjust.
Set Goals and Save
One of the downsides of “gig work” is the lack of employer-provided benefits. This means it is solely up to you to plan and save for your future.
You’ll need to develop the habit of saving. Set up monthly automatic transfers and manually transfer excess in the high earning months. Establish an emergency fund with $1,000 to help you get out of debt, stay out of debt, and cover emergency expenses without a credit card.
Then work toward saving 3-6 months’ of your living expenses. Try to ultimately have 12 months’ of living expenses set aside in a savings account, separate from your $1,000 emergency savings fund. This is your safety net for lower income months to cover unexpected medical bills, home and vehicle repairs, and other surprise expenses.
If you want to make a big purchase, go on vacation, or start saving for college education, set separate savings goals. Again, your budget is going to be crucial in accomplishing this. Avoid relying on credit cards and accumulating interest charges.
And of course, start saving for retirement. This blog outlines many retirement savings options for freelancers and gig workers. I recommend you do some research, find the option that will serve you best, and get to work. Compound interest works in your favor, so the sooner you start saving, the more money you’ll have for retirement when the time comes.
The best example of a great budget on an inconsistent income is found in Genesis 41-47. God had warned Pharaoh through Joseph that 7 years of harvest were coming to the land of Egypt, followed by 7 years of famine. So Joseph advised Pharaoh to be diligent to save 20% in the years of plenty. This savings plan enabled the entire country of Egypt and surrounding countries to be fed during the severe famine.
If Pharaoh had not enabled Joseph to put a plan in place during the plentiful years, the years of famine would have wiped out entire nations. It may be difficult, but you can have a great budget on an inconsistent income!
God created you to work and cares just as much about how you make your money as He does how you spend it. So in the ups and downs of your work and planning, remember what Paul told the Philippians:
Rejoice in the Lord always; again I will say, rejoice. Let your reasonableness be known to everyone. The Lord is at hand; do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God. And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus.
Don’t grow weary while creating a workable plan. It may take you 6-12 months to get on track, so be disciplined and exercise self-control. Depending on your current lifestyle, you may need to make adjustments so you can save when extra income comes in. By living according to God’s principles, you’ll be able to experience true peace.
Say no to what you want today so you have what you need tomorrow. Most importantly, trust God for His daily provision while applying His principles of faithful stewardship to your finances.
Originally published on the Christian Post, April 6, 2018