“My paycheck is unpredictable.”
It’s the underlying challenge every freelancer, independent contractor, salesperson, solopreneur and business owner faces. While this factor alone scares many people away from pursuing their entrepreneurial aspirations, it is nothing to fear when you are prepared to manage the potential pitfalls of irregular income. In fact, it can be a powerful motivator. Here are a few ways to maximize the busy times, weather the dry spells, and carry on “business as usual” every day in between.
1. Know Your Base Expenses
We all have expenses we absolutely must cover each month—rent, utilities, debts and the like. On the surface, creating a simple spreadsheet of these items will help you understand your baseline. The deeper and lesser-recognized value in this exercise, however, is that you will be better able to assess business opportunities. If a new client or project is going to take up X time that doesn’t equate to Y dollars allowing you to pay your rent and bills, you can avert wasted time and pursue a more viable engagement.
2. Isolate Extraneous Expenses
Just like we all have base expenses, we all have less-than-necessary expenses, too. Do you really need that subscription service? How about that new wardrobe?
No, I am not telling you to start cutting your hobbies and entertainment. Rather, simply know where you could conceivably spend less. That way, you can adjust quickly if needed. (Ideally, that day will never come.)
3. Calculate Your Average Income
Irregular income can still be represented as a somewhat “regular” number. If you are just jumping into a position without a steady paycheck, you can calculate in as little as three months roughly how much you can expect to make at your current pace. And the longer you are in business, the more of a stronghold you can take based on leads, conversion rates and other basic metrics. Before you know it, you essentially have a salary—which we will talk about next.
4. Set a Salary
It is far too easy to deposit a check, go back to work, and lose track of when money is coming in or going out. Even if you are a sole proprietor with no subcontractors, going through the process of paying yourself a salary—say, a fixed percentage of your revenue each month—and seeing the money physically change hands from your business to your personal account will facilitate smarter money management. Paying yourself appropriately is also extremely important for various tax purposes, including estimated taxes and deductions.
5. Save for Slow Spells
It is going to happen; you will have a slow month, lose a client, or have some sort of moment in which you realize you are below your benchmark. Do you know what else will happen, though? You will have fantastic months that put you well ahead of the curve. The latter times are when you want to rely for the former, not vice-versa. Put extra money away whenever you can, reduce your extraneous expenses as necessary, and make the most of slow periods by focusing on business development, marketing, networking, etc.
It is also helpful to keep track of how many “slow” months you could endure with your current savings. Want to prepare even more thoroughly? Build your emergency fund to cover six or more months of your base expenses with absolutely zero income.
6. Keep Your Poise
Enough gloom and doom. Now that we have addressed the slow months, let’s take a step back and realize that it is very unlikely you will go six months with no income if you run your business properly and bring a strong work ethic. Realize that you are in your position because you have the skills and experience to excel beyond what a day job will offer. Don’t panic when things become uncertain—if you are on top of your finances, you will have plenty of buffer for your income to be somewhat inconsistent.
7. Identify Trends
Work will fluctuate daily—and so might for your finances, in turn. More important than making rash decisions in the day-to-day is gaining a clear picture of where your business is going. If you lose money one month, that is to be expected from time to time. If you are losing money over the course of several months, there is a little more cause for action. With all of the above tips implemented, any significant trends in your income will stand out and you will be able to budget accordingly.
Irregular income is not the enemy. It just poses a different lifestyle that requires more emphasis on personal finances—and that’s a good thing.
About the author:
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovate ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over 19 years experience in the industry. Credit.org is a nonprofit financial counseling agency specializing in Debt Management Plans and helping people get out of debt.