Self-employment offers many benefits, from flexible hours to higher (potentially even unlimited) income ceilings. However, this comes with the bugbear known as variable income. Freelancers, gig economy workers, business owners, etc. all need to contend with this challenge; so we’ve put together the basic survival skills you need to get by:
Your income may be unpredictable, but expenses tend to stay consistent. For example, it’s quite easy to predict that you’ll spend more around the end of the year (Christmas season), than you might in June.
It’s also possible to identify such cycles in your business, after some time. You may, for instance, find that demand for your services is lower during periods like the Chinese 7th Month; this is common for some businesses and sales professions, where buyers may hold back certain purchases due to inauspicious timing.
It’s important to identify these cycles, by tracking your expenses. When you come near a month of higher expenses, make an effort to increase your savings, or take on more work if it’s available.
A common issue among freelancers is lack of time, for servicing new clients. This is coupled with another complication, which is setting your price. Here’s a way to fix both issues at once:
Work out your bandwidth (i.e., how much work you can reasonably take on), and raise your fees as your bandwidth is filled. If you struggle to make time for another job, for instance, consider charging more for it: if you lose the job, your work roster is already full anyway. If the client is still willing to pay a higher rate, then you’re fairly compensated for the extra workload.
This isn’t possible for every self-employed job, but it’s definitely worth considering if you provide a service.
Treat yourself as an employee, and limit your pay. If you usually make around $4,000 a month, for example, then this is the amount you should use / budget for, even during good times when you’re making $6,000 or $7,000.
The unused money should go into a savings account. During dry spells, when your total earnings are lower, you can use these excess savings to maintain a $4,000-a-month budget.
This prevents wild fluctuations in your overall income, and makes you better prepared to take on larger commitments such as home loans, education loans, a first child, etc.
Your budget for next month should be based on how much you have this month.
So if you have $4,000 this month, but are expecting $6,000 next month, then next month’s budget should be based on $4,000. This is to account for issues common to the self-employed, such as clients paying late, customers pulling out at the last minute, and so forth.
There are some costs which may be unpredictable, and that you can’t budget for (e.g., having to replace damaged equipment). For these, you need to have an emergency savings fund, of at least 12 months’ of your expenses.
The amount you can borrow from banks, or other licensed financial institutions, tend to be lower if you’re on variable income. For example, banks calculate your income as being 30 per cent lower than its average, for the purposes of getting a home loan.
Personal loans and credit card loans may be harder to secure, particularly in your first year of self-employment (as you have no assessable income for the lenders to consider).
For these reasons, it’s important for self-employed people to maintain a higher savings fund (see point 4). You also need to plan major purchases – such as education, housing, or cars – with greater care. As you cannot borrow as much, you will often need to spend more time saving for higher down payments.
Despite the inconvenience, this could be a blessing in disguise, as it also means you end to borrow less.
When you’re self-employed, it’s vital to ensure your money is coming from different avenues. This can range from dividend paying stocks, to multiple side-businesses. You should always be seeking to diversify your income sources, whenever you have the possibility.
Clients don’t have the same obligations to freelance or contract staff, as they do to regular employees. They can terminate you more easily, and are likely to do so before retrenching their own staff.
As such, it’s perilous to be dependent on any single client. It’s possible that most or all of your income comes from a single major client; but you should ensure that one client never accounts for 100 per cent of your income.
If you’re new to the idea of variable income, it can be daunting and tough to cope. At Exodus Capital, we steward both veterans and new entrants to the finance industry, in getting ahead with their careers. Do reach out to us for help, if you want career opportunities that can match your wider goals.
