Welcome to the Healthy Rich podcast, a show about money for misfits!
I’m Dana Miranda, a financial educator and author of You Don’t Need a Budget.
In this episode, I discuss:
🥑 How I manage my money as a freelance writer
🥑 Tips to build a buffer in your bank account
🥑 What to do when you make enough, but money always feels tight
Resources mentioned:
Money Map worksheet from YDNAB
You can always follow the podcast right here via email or Substack, or you can subscribe in your favorite podcast app. The transcript is below. Enjoy!
Transcript:
Welcome to the Healthy Rich podcast, a show about money for misfits! I’m Dana Miranda, a certified educator in personal finance and author of YOU DON’T NEED A BUDGET: STOP WORRYING ABOUT DEBT, SPEND WITHOUT SHAME, AND MANAGE MONEY WITH EASE.
In today’s show, I’m talking about how I manage money with inconsistent income as a freelancer and what you can do to stabilize your income whether you’re self-employed or not.
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This topic is based on a question from a friend who asked:
“I was wondering if you or the book had any insights on managing finances as a freelancer on an irregular income (specifically without a budget)?”
Freelancing specifically forces you to figure out how to manage money on an irregular income, but I’m going to expand this further to talk about how to manage money when you have an irregular income from any kind of work.
People often turn to budgeting in this kind of situation, because it’s the only tool offered to make you feel like you’re in control of what often feels like out of control financial circumstances. But budgeting is even harder with inconsistent income, because you don’t know what you’ll have available to spend. So you’ll probably abandon a budget pretty quickly if you try to manage inconsistent income this way.
The challenge of inconsistent income is that you might set your life up based on a certain amount of spending each month. But if your income dips below that amount during a couple of slow months out of the year, your finances can be thrown totally out of whack, and you’re stuck playing catch up. Or you’re super cautious, and you restrict your life to low spending, even though some months you make a ton more money than you need. And then you don’t have a plan for those extra funds, so they either languish in savings without a purpose, or you splurge to treat yourself because you spend so much time restricting.
I’ve been dealing with an inconsistent income as a freelancer for the past five years, and I also dealt with an inconsistent income for my entire adulthood before starting my full-time job in media in 2015. Before being a poor writer, I was a poor service worker, making my living mostly as a barista, but also briefly as a video store clerk and occasionally working in sandwich shops — once I worked at a New York–style bagel shop in Wisconsin, and I still think about those bagels and the delicious vegetarian sandwiches I made there.
Sorry — back on track.
As a freelancer, my income comes from client work and newsletter subscriptions, and I also had some bulk payments from my book advance for You Don’t Need a Budget, followed by several months of no income while I wrote the book.
I handle my finances by paying myself a regular salary, rather than letting my household ride the rollercoaster of this ebbing and flowing income.
So, I’ll talk about the technical details of how I manage my money as a freelancer — and I’ll think about how I might have used these tips when I was earning inconsistent income as a service worker to see if I can help you do something similar with irregular income from hourly, contingent or part-time work to stabilize your finances.
First, it’s easiest to start with a little bit of savings
I talked about this in the last episode about how to start freelancing: The most straightforward way to set yourself up for stable income is to have some savings built up. I’ll link to that in the show notes, but here’s the gist:
You need some kind of buffer to be able to pay yourself consistently from inconsistent income. That buffer can either come from paying yourself significantly less than you bring in or having savings to smooth out the ebbs and flows of your income.
I did this by building a comfort fund while I was still an employee. Before I started freelancing, I built up $15,000 in savings for my household. That eventually grew into the personal comfort fund we have now. Having that savings helped me get through my first few months of freelancing, where I earned about $3,000 a month while I figured out how to find the right clients and do work that paid off better for me.
Once I was getting more pay as a freelancer, I was able to put some money into savings that was just for my business. Now I keep about a $20,000 buffer in my business bank account so I can dip into that if I have a light freelance month and get a consistent paycheck for my household — which is important, because I’m the primary earner to support myself and my partner.
That comfort fund amount feels right for me, because it feels like it could get me through several very low-earning months or some kind of career transition before earning more money would feel very urgent. But I could probably eke by month to month with a buffer of about $5,000, and you might need more or less depending on the income your household needs.
To build this savings, I talk in the book about using a money map — and I’ll link in the show notes to a money map worksheet you can download from the book’s website.
With a money map, you list your resources and financial commitments, so you can see how you might use money to build a comfort fund. Maybe that means adjusting your big financial commitments, like rent or debt payoff. Maybe it means adjusting your spending to redirect funds toward savings. Maybe it means relying on credit cards or student loan refunds while you get started freelancing or with a job transition, so you can do more with your income.
Laying out your available resources through the money map can help you see exactly what you’re working with so you can decide how to use money to best support the next steps you want to take.
First, let’s talk about how I manage my money as a freelancer
Later I’ll get into how to apply this to work as an employee, but first I’ll talk about my experience as a self-employed freelance writer.
When I started freelancing in 2020, I started out as a sole proprietor, which means I was just an individual doing contract work. I didn’t have a business entity or a tax ID number separate from my Social Security number. So there’s no way to open an actual “business bank account” as an individual without that tax ID.
But I still wanted to build out my business finances separate from my personal, especially because I share my personal finances with my partner.
So I opened a second checking account and savings account with my credit union. They were still technically personal accounts, but they were only in my name, and I only used them for business purposes. I got all of my freelance payments into that checking account and doled it out every two weeks like a paycheck.
I paid a set amount into my personal, household, account, and I put 30% of that into the business savings account for quarterly estimated taxes. That set amount I paid my household was low as I got started, and I slowly kicked it up as I earned more money from clients, but I always set an amount that I knew I’d receive each payday.
Now, I manage my money through an LLC
In September 2021, after almost two years of freelancing, I organized an LLC in Wisconsin. That helped me formalize the way I pay myself, but it’s still the same idea.
Now I have an actual business checking and savings account. And I use payroll software to pay myself a salary as an employee. (Side note: Employing myself requires filing taxes as an S Corp, which I won’t get into here, but it’s something you could research and talk to an accountant about whether it would make sense for you.)
So now, even though my work is the same as a freelancer, I’m actually paid like a W-2 employee. All of my client payments, my revenue, goes into the LLC’s bank account. I set an annual salary, and I get a direct deposit paycheck twice a month. The software takes care of payroll taxes and income taxes, so now I don’t deal with quarterly tax payments unless I have a bunch of extra money coming into the business that I’m not paying myself.
You could do a simpler version of this without the complexity of being an S Corp or even an LLC if you don’t want to.
You can get an Employer Identification Number from the IRS as a sole proprietor, and you can use that to open a business account with most banks. Or you can organize an LLC with your state and get an EIN attached to that entity and do the same thing.
This way, you’d have access to a bank account specifically designed for business use that’s separate from your household finances. And it might come with features personal accounts don’t have — like mine facilitates ACH payments for free, so it’s easy to pay Healthy Rich contributors without putting them through the trouble of setting up in my payroll software.
Another side note: I no longer have a retirement account — I’ve written before about using that savings to buy a house, and about my issues with the ethics of investing. But if you work for yourself or for an employer that doesn’t offer a retirement plan, that’s an added piece of money management for you to do. You might be able to set up an IRA with your bank or credit union, or use an online brokerage, and you can schedule automatic contributions from your business bank account. If you employ yourself, you might be able to access a retirement plan through payroll software — but I think those are usually inaccessible or prohibitively expensive for a single person or very small business.
Can you do this as an employee?
So this is pretty standard advice for freelancers to smooth out your household income, instead of trying to get by on the ebbs and flows of client work. But I don’t often hear people share the same kind of advice with others who have inconsistent income, like hourly, contingent or part-time workers.
And I imagine you can use some of this same advice!
The most similar situation might be if you work as a W-2 employee but in a contingent, contractual position, like an adjunct instructor or a temp worker. In this case, you might get a paycheck for a few months at a time, then go for a stretch without any pay. Whether you pick up freelance work in that downtime or just wait for the next W-2 contract, you’ll really benefit from setting up your money as if you’re self-employed, so your household can rely on a consistent income.
A major difference if you work for someone else in a more typical job is that you don’t operate like a business. Money comes straight to you, like mine did when I was a sole proprietor. So I can see a scenario where you can mimic my system by setting up multiple bank accounts in the same way, receiving your paychecks into one, and feeding a consistent income into an account for your household.
Your taxes are already paid from your paycheck, so you wouldn’t have to take that extra step of setting tax money aside.
Another probably simpler way of doing this as an employee is by reverse budgeting your paycheck. This is another thing I talk about in the book.
Reverse budgeting is an anti-budget method of managing your money that helps you put money toward your priorities first and have room to spend what you want, basically from what’s leftover.
If you get paid through direct deposit, you can usually do this automatically by having your employer deposit money into multiple accounts. So you can direct a certain amount into a household checking account that covers your financial commitments, like rent and bills. You can direct another dollar amount or percentage into accounts for various financial goals, like a comfort fund or a big spending goal. And you can have the remainder deposited into an account you use for spending.
Reverse budgeting doesn’t change the amount of money coming into your household. But it can have a similar effect of smoothing over your income, because it lets you ensure your priorities are covered and to spend without tracking or restriction. Your spending and savings would ebb and flow with the amount of your paycheck, but you could ensure your commitments are always covered.
But what if the money isn’t enough?
Any nitty gritty money management method like the ones I’ve been talking about require you to make enough money to cover your financial commitments.
When I talk about an inconsistent income in this case, I’m not talking about unreliable paychecks that don’t bring in enough money to cover your rent, bills, food and other spending each month. I’m talking about, on the whole, having enough over, say, six months or a year, to cover your needs, but having some booms and busts throughout the year so that some months feel tighter than others.
If you’ve been dealing with inconsistent income and scraping by paycheck to paycheck, you might not know which situation you’re in. You can use your money map to figure it out.
In the money map, you’ll list your financial commitments — all the bills you pay each month. And in the section where you list your income, you can average your income from the past three or six or 12 months. The length of time depends on what makes sense for you.
If you’ve just been in a new job for three months and your pay before that was wildly different, just use your income from the past three months to get an average of what you earn at this new job. But if you’ve been doing the same kind of contingent work or the same hourly job for several months or years, look at a longer period — at least six months, but a year is even better, because it covers all four seasons that might impact your work.
Look at your bank account or your paystubs, whatever you can find, and make a list of the total you earned each month (after taxes, if those are coming out of your paycheck). Then, remember some middle school math to find the average: Add all of those totals together, and divide the sum by the number of months. The result is your average monthly income.
List that average in your money map to see how it balances with your commitments.
If that average falls below the total of your monthly commitments, your issue isn’t just inconsistent income, it’s not enough money. These money management techniques won’t fix that issue.
In that case, you might be able to change your commitments or to earn more income. Or maybe you’re contributing to goals like savings or debt payoff that you can deprioritize for a while. But if you can’t pull any of those levers, you could also look into resources beyond your income to expand what you have access to.
Consider assets you could sell or tap into, like taking a withdrawal or loan from a retirement account.
Consider community and government resources, like unemployment benefits during your downtown or reduced-income housing; or alternative ways to get some of the things you’re paying for now, like thrift stores or food banks.
And consider debt resources available to you — could you raise your credit limit or open a new credit card? Tap into home equity? Take out a loan to get through a tough period?
All of these actions have different consequences to consider (which I write about more in depth in my book…!) and they’ll fit into different people’s lives in different ways. But they’re some things you can think about if you’ve been listening to this and thinking, This will never work for me because I actually don’t make enough money.
On this note, I’ll reiterate something directly from You Don’t Need a Budget:
“Regardless of how much you shift your mindset toward a budget-free approach, managing money without stress requires having enough — whatever that means to you. You have to have enough resources to fund your commitments, goals, spending, and giving, whether those resources come from income, assets, community resources, or debt.
And sometimes, I know, there just aren’t enough resources to cover it all. How do you spend with ease and joy if you’re doing everything you can to cover your commitments right now? In reality, you might not be able to do it all right now.
You can’t expect to have your money in balance if it takes everything you’ve got just to provide your basic needs and rightful comforts. A budget-free approach doesn’t promise the fantasy of being rich.
Instead, the promise of this radical reimagining is that you can learn to forgive yourself and the people around you for your financial circumstances. You can stop believing you’re to blame for your hardship and solely responsible for your salvation.”
So — that gets much more into your mindset than the tactical stuff I’ve been talking about throughout this episode.
But at some point, I do think it’s important to recognize that tactical changes and silver-bullet solutions won’t actually solve your financial challenges. That has to come from broader change, and you can forgive yourself and do whatever you need to take care of yourself in the meantime.
If you DO make enough, but money always feels tight
But let’s go back to the tactical for a minute to close the loop on where I started. So we did the money map calculation where you averaged out your monthly income to see how it balances with your commitments.
What if you see that you actually do make enough money to cover your commitments with some left over each month, but somehow you still find yourself living paycheck to paycheck and never working toward any goals?
In that case, these tactical changes could actually make a difference for you. Reaching your goals and using money the way you want is an issue of money management. Changing the way you manage money should change what you’re able to do with money.
In this case, start with setting your priorities. I recommend looking at your commitments first, because big items like housing make up the bulk of our costs every month. Do your monthly bills reflect your priorities? Or are you scrambling to keep up with costs for things you don’t actually care about?
If you can make changes to your commitments to better align with your priorities, start there. Then look at your goals. Are you currently putting any money toward savings, investment or debt payoff that matters to you? If you are, do these contributions align with your priorities? If you’re not, what do you want to prioritize?
With your income averaged and your commitments listed, you can use your money map to see contributions to goals that make sense for you. Tweak those and check your Yes Fund to see how those contributions might affect what you have available for spending.
Now, to get started with leveling out your income — look at the lowest monthly income you listed before finding that average. What’s the difference between that and your average? That could be a good, feasible goal to get start on your comfort fund.
Then take some time to build up your comfort fund by putting a little bit in it during months when your income is higher than that average. And experiment with either reverse budgeting or using multiple bank accounts to manage your money. As you get paid, start directing money toward your commitments and goals, and let the rest land in your spending account.
It’ll take some time to level out and find stability in your income. But if you’re building that comfort fund during boom months, you should be able to get to a place where you can consistently contribute that average income to your household — so you can cover your commitments, contribute to your goals and spend on what you want without worry.
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What one financial topic do you wish you knew more about? What would help you have a better relationship with money? Submit your question to guide a future episode!
Check the show notes at healthyrich DOT co for a form to submit your questions. And while you’re there, sign up for the Healthy Rich newsletter to be the first to know when we drop something new.
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