Freelancing and the Curse of “the Lumpy Income Stream”

Nov 20, 2017 | Jessica Ogilvie

Ah, the lumpy income stream. The bane of all freelancers’ existences: the reason behind anxious breakdowns, pleading with landlords, disagreements with family — all the reasons you got into this line of work in the first place! The lumpy income stream refers to the inconsistency in freelancing pay: some months, you bank (pay off them credit cards!!!) and other months, your total income is somewhere between $0 and $10.

So what’s a freelancer to do? Unfortunately, your landlord and Netflix aren’t as understanding as they should be about how it would be way easier if you could just pay on a more flexible basis (you’re good for it!), so that means you have to get a plan in place. Here are some steps you can take now. In future posts, we’ll refine and expand on these, with an eye towards the long game.

Understand Your Expenses

To smooth out your income stream, you first have to know how much money you need, and for what, each month. (A caveat: We assume that you are making enough money to cover your expenses. If you’re not, stay tuned, because we’ll soon do a story about what to do if you’re not making enough money to cover your expenses.)

This is extremely standard advice, but the best way to figure out how much you need to make in a month (and also how to budget what you make) is to track your spending habits for between one and three months. You’ll likely find that each month is pretty similar, give or take a few hundred dollars. So, say you discover that you need $1,500 for rent, $1,000 for bills, and then another $1,000 (you are frugal!) for other expenses, like food, gas, and the occasional movie or drinks out (some people count food and gas as part of their bills; do what feels right to you, young Jedi). That’s $3,500 a month, or, if you want to go minimalist, $2,500 for just rent and bills. The best way to make sure that you always have that money ready? Put it the hell out of your sight. Which leads us to…

Set Up a Savings Account (Or Three)

Fun fact: You can have as many savings accounts as you damn well please. You can have one for your rent, one for your bills, one for actual savings, and so on. People who are not freelancers (we know; crazy) are advised to have three months’ worth of rent and bills saved in case of an emergency. For you, dear freelancer, your entire life is an emergency, so you should plan to have three months’ worth of rent and bills saved in the inevitable event that you have a slow month. The difference between you and the non-freelancer, then, is that you will immediately (immediately!) replenish that account with your next few paychecks, the idea being to always have three months’ worth of rent and bills in there, no matter what.

Save For Taxes

Yes, you DO have to. It’s very, very, very tempting as a freelancer to adopt an “I’ll deal with that later” attitude towards taxes, since they’re not taken out of your paychecks automatically, and you no doubt have about a million things you could do (need to do, even) with that cash. But when April rolls around and you suddenly find that you owe several thousand dollars to the IRS, that money isn’t going to fall from the sky. And the last thing you want is a build-up of back taxes; you’re stressed out about money enough without that hanging over your head.

A simple way to figure out how much to save for taxes is to look up the 2018 tax brackets (you can find them here, and figure out where you land. This will give you an idea of the maximum amount you’ll owe at the end of the year. Since you freelance, you’ll have all kinds of glorious write-offs, so your final payment will likely be a little (or a lot) lower than this estimate. But then, guess what? You have extra money.

Another tax option is to pay estimated taxes. That typically involves estimating how much you’ll owe based on how much you paid in taxes last year, dividing it by four, and paying it to the IRS every three months. (Follow that math? It’s four payments a year.)

Of course, budgeting and planning with your unpredictable freelancer’s income can get much more complicated than this. But this is a foundation upon which to plan your ultimate world domination; follow these three steps to get yourself started, and you’ll find that these habits will serve you well for years to come.