Some Ideas For Stabilizing Your Income If You’re a Freelancer or Self-Employed

Anyone who’s ever lived solely off part-time work, contracting, scholarships, royalties, freelance or other means of self-employment knows what it’s like to not receive a steady paycheck.  You might be financially free by definition, but you still might not be bringing in a steady paycheck.  Royalties from books through a traditional publisher might only reach you once a year, for example.  If you’re a student, undergrad or grad, you might only receive your scholarship funds disbursement at the beginning of each term.  All this makes for difficult financial planning.  It’s one of the reasons businesses prefer to lock-in long term contracts because it makes it easier to plan into the future what sorts of finances you’ll have available.

Let’s first look at just some of the more obvious problems you might encounter if you’re not receiving a consistent, bi-weekly direct deposit into your bank account:

• it’s harder to put your bills and savings “on automatic” payment
• you can’t always control exactly when a client pays you
• it can be harder to do up monthly budgets

So if you work on a contract or self-employment basis, what do you do?

(1) Keep lump sums in a savings account and parcel out as needed. As a PhD student getting paid only twice a year, I’ve tried to deal with the lump sum by making a budget in advance and then keeping most of it in a savings account, from which each month I draw just the amount I allotted for the budget.  This is kind of a basic way of “paying yourself.”  But it’s difficult to maintain, especially when it’s that easy to move funds over.  Nevertheless, it might work for disciplined people.

(2) Bulk up billable hours ahead of schedule or according to a set schedule. For example, if you do research work or other contract-based work where you are largely in control of when you do the work, but not when you are paid for it, you can organize your work according to when you are reimbursed for it, so that you are not waiting one and a half months before you get paid.  But sometimes we can’t control when the work comes in, either.  So:

(3) Predetermine what expenses you will allot your contract hours to. So if you’ll be paid on the 15th, and your credit card bills come due on the 16th, you might direct this income to the credit cards directly.  It depends on how much the pay is, obviously.  If it’s your entire income, then you’ll have to portion it out over all expenses as needed.

(4) Each time you are paid, set aside a certain percentage for savings and emergency funds.  This is common sense anyway, but the difference is that you may not be able to have this on “automatic” so you’ll have to remember to do this. And I might even argue that it’s more important because if you can’t always control *when* you’ll be paid, an emergency fund can help smooth out these ups and downs that can compound the problems of unexpected needs.  You might even want to think about having more than one emergency fund.

(5) Invest in dividend-paying stocks such that you receive monthly payments.  Although there is de facto a certain degree of risk involved in stocks, there is also a wide range of risk, where some companies can be considered less risky than others (in usual circumstances).  Nevertheless, one great thing about dividend payments is that they do come on a consistent basis, and you might even get a “raise” once or twice a year if you choose the right companies.  Since stocks pay quarterly, just line up the dates of three different companies (at a minimum) so their quarters line up such that you receive a dividend payment at roughly the same time every month.  This option will take quite a bit of money to work into a meaningful-sized income, but the idea is great, and it’s something to work towards. This is also a great way to build up an emergency fund.

(6) Rent out a room in your house, or take on an investment property for this purpose. This might even be more riskier than receiving dividends, depending on what you focus on, since more of your own time, personal space, commitment and uncertainties are involved.  I won’t go into all the pros and cons of rental properties here, but it’s enough to say that this could be a good way to smooth out some of your alternative income (even if it’s not the income you’d want to depend on for your primary living expenses).  Ultimately you could take the rental income and redirect it into a less risky asset class, as I suggest with the “fountain of wealth preservation” model.

This is an admittedly incomplete list, but the point is that the self-employed and contractors, freelancers and others on sporadic incomes might want to work to find a way to smooth out their cashflow to help with budgeting.  It’s hard enough to deal with unexpected expenses, but piecemeal and unpredictable payments can make this even more difficult.  A somewhat related issue for (Canadian) small business owners is whether you should incorporate or not, since unexpected expenses can also involve such pleasantries as lawsuits and extra taxes, unfortunately.

I’d be interested to hear from others who are basically self-employed or who have run into these problems and found ways to work around them.  If you’re a full-time blogger, part of your income might come on a regular basis, but part of it might come from other sources.  Any other ideas on how to manage this cashflow?

• How Many Economists Does It Take To Build A Successful Blog? One, if it's The Weakonomist
• Here's Why You Should Ideally Have Four Emergency Funds
• How Should You Spend Your Tax Refund?
• Are You Doing Your Life's Work, or Are You An Employee of The Market?
• If You're Broke and You Know It, Do These Four Things

• The Entrepreneur Fund: One Year of Projected Expenses
• Budgeting for Those Bereft in Budget Sense:
• Stashing Your Cash
• How to create a workable budget
• Save Time, Money and Space in Over 80 Ways

Tagged as: contract work, employment income, financial planning, freelance, part-time, self-employed