How to manage income fluctuations when you’re self-employed
As the state of self-employment continues to evolve, the shifting economy and varying obstacles are increasing the need for freelancers to adapt and innovate how they operate.
Due to the inconsistent nature of freelance work, income fluctuation has become one of the biggest challenges that the self-employed industry is experiencing, with a 2024 Markel report revealing that over half of freelancers are experiencing irregular income due to fluctuating economic circumstances.
To understand the key strategical planning and financial discipline required to manage income fluctuations, read our key tactics below.
1. Create a budget
To help navigate the changing demand, Investopedia recommends creating a detailed budget that takes into account both your fixed and variable expenses. Write down a list of your household expenses, such as utility bills, alongside essentials like grocery shopping, and the desired amount you would like to put into your savings each month. Being able to understand your finances will allow you to assess how much income needs to be allocated towards the times where you may not have a sufficient workload.
For further assistance on how to budget, take a look at our dedicated article here.
2. Give yourself a steady income
An excellent way of creating stability within your income is to transfer yourself the same set amount of money each month. This amount should include your monthly baseline expenses, eventually working towards a process where you will pay yourself a twelfth of your annual earnings to maintain a fixed salary for a longer period of time. Coconut shares that this will allow you to see if you are making more money than predicted and gives you the opportunity to decide how you wish to use it if so, or whether to save it.
3. Build an emergency fund
If you do find yourself making more money than forecasted per month, it’s strongly recommended that you put this money aside to build up an emergency fund. An article by Succession Wealth revealed that saving a portion of your income when you’re going through a high-earning period will create a financial safety net for times of need. This fund should typically be enough to cover a minimum of three to six months of expenses, so that you will be able to provide yourself with enough financial security during any potential periods of low income. Having this money set aside is also ideal for covering any unexpected costs which may occur in your personal life, such as vehicle repairs or pharmaceutical bills.
The percentage of money to put aside is for you to decide, however it’s suggested to contribute as much as you are able to an emergency fund, especially within the current volatile landscape
4. Diversify streams of income
Relying on a single source of income can sometimes pose a potential risk. To address this, diversifying your income streams, such as offering your clients further services, taking on different types of projects or exploring passive income opportunities, can work towards reducing the impact of fluctuations. Markel’s exploration into the state of self-employment in the UK revealed that the demand for flexible and specialised services from hiring businesses has continued, leading to an opportunity for freelancers to adapt and innovate in response to changing market conditions. This report also discovered that 33% of the self-employed are experiencing seasonal fluctuations in demand, showcasing the need for diversification in revenue streams and alignment with recurring market trends. Preparing for busy seasons in peak times and strategically planning leave in slower months can also help with this.
5. Plan for taxes
With self-employment comes the responsibility of calculating and submitting your own taxes. Throughout the financial year, make sure to set aside a percentage of your income for taxes to avoid any surprises when the time to submit arrives. If you need assistance with understanding your liabilities and potential dedications, consider consulting with a tax professional, or use Markel’s self-employed income calculator. An article from LinkedIn shares how strategies such as quarterly estimated tax payments are ideal for ensuring you avoid any underpayment penalties.
6. Track your spending
The importance of tracking your business and personal expenses is essential. Manage and identify areas where costs can be re-evaluated without compromising on the quality of the work you produce. Being more cautious with your spending can help you in the case of weathering periods of lower income. This can also identify any areas where you may be over-spending or potential irregularities that may have gone unnoticed, working to save this money for times where it is needed.
7. Review regularly
Review your financial situation often and adjust your strategies as needed. Flexibility and adaptability are crucial in managing the inherent uncertainties of self-employment. GetSmarterAboutMoney.ca advises regularly reviewing your budget, especially as your business grows, as you may find that you need to budget for more expenses, or you could be earning more than predicted, meaning your steady income and emergency fund can grow. Evaluating your finances often allows you to optimise your earnings to help you during any slow periods of work.
Learn about our business insurance, here, or for more guidance on how to embark upon a self-employed career, visit our Help & Guidance hub.