Unpredictable income? Here’s how to manage your money

By Jeanne Sahadi, CNN Business

Entrepreneurs. Freelancers. Gig workers. Consultants. Salespeople.

If you freelance, earn commissions, run a small business, or rely on paying clients for a living, your income is likely unpredictable from year to year.

But how you manage and allocate the money you make shouldn’t be.

Here are some smart ways to ensure you have enough to pay your bills, minimize debt and build savings despite having a fluctuating income.

Account for all your expenses

Get real about how much you actually need to cover the essential fixed and variable expenses in your life — housing, food, gas, utilities, debt payments, etc.

Do the same for your business expenses.

In making your calculations, don’t forget to include taxes, especially since you may need to pay estimated taxes quarterly, so you should have money set aside to do that to avoid penalties.

Besides income taxes, you also will be subject to self-employment taxes to fund Social Security and Medicare, and if you have hired employees, you’ll need to provide the employer portion of those taxes for them, too.

To be able to take full advantage of any tax deductions that may be available to you, keep very good records of receipts for payments and purchases you make.

And don’t forget about buying and paying for disability insurance. “You are your asset. And if you can’t work, you have no income,” said certified financial planner Lazetta Braxton, co-CEO of 2050 Wealth Partners.

Be realistic about your earning potential

Your chosen field, the seasonal ebbs and flows in your line of work and what differentiates you from your competition will influence how much revenue you can generate in a year.

Project a realistic range of how much money you can bring in, and base your financial strategies around the lower end of that range if you want to be safe, said certified financial planner Kerry O’Brien, who founded BeingFIT Financial.

Braxton also recommends, especially if you’re just starting a business, that you have a related side gig to augment your income. That might include teaching an e-course, doing paid speaking engagements or using UpWork to find an occasional project.

“Use your human capital. Leverage it in ways that are not overconsuming,” she said.

Keep cash reserves for lean months and surprise bills

Try to set aside six to 12 months’ worth of expenses for those months when you’re not bringing in much income.

If you have a spouse making a steady income who is supporting your household, you may not need more than six months set aside, O’Brien said. The same may be true if you have very low overhead costs, which means you are less likely to face unexpected repairs, hikes in rent or inflationary prices on supplies.

Be systematic in how you manage paydays

Whether you get a check for $500 or $50,000, certified financial planner and CPA Ashlee de Steiger, who founded Gunder Wealth Management, recommends systematically allocating it in the same way across your pre-determined financial needs.

Otherwise, de Steiger noted, “It’s easy to say, ‘Oh this is a small check, I’ll just spend it.’ Or ‘This is a big one, I’ll put it toward a home purchase.'”

Based on your expenses and financial goals, she recommends deciding how much of every paycheck should be allocated to key areas: X% for essentials, like housing and food, X% for taxes, and X% for savings goals, like traveling, buying a home or retirement.

“Focus less on dollar amounts, which can vary wildly, and hone in on a process,” de Steiger recommends. “If you systemize it, you can set it and forget it.”

Strategize retirement savings

Ideally you should set aside at least 10% to 20% of every paycheck for retirement, de Steiger said.

While that may be difficult to do when you’re just launching a new venture, Braxton urges clients not to let more than a year or two go by without making any retirement savings contributions.

“Two years is the max,” she said, noting that if you can’t afford to set aside some money for retirement after that, you need to find a way to make more money.

If your monthly income is too variable for you to feel comfortable setting aside retirement savings every few weeks, you always have until April 15 of the next calendar year to make IRA contributions once you have a firmer grasp on what you actually made the year before.

Different savings vehicles have different tax advantages and you can use the differences to your advantage. A SEP-IRA, for instance, allows for tax deductible contributions of up to $61,000 a year, which may make the most sense in your high-earning years. And a Roth IRA offers tax-free growth and tax-free withdrawals for your after-tax contributions, which may make sense in your lowest-earning years since there is an income cap on who can contribute to a Roth.

If you set up a solo 401(k), O’Brien noted, see if the brokerage where you house your account allows you to have within it a tax-deductible bucket for regular 401(k) contributions and an after-tax bucket for Roth 401(k) contributions. That way you can choose which makes the most sense for you in a given year.

Seek outside help

Even if you’re not (yet) making a lot of money in your independent venture or crushing it with your commissions, it may pay to periodically consult with a fee-only tax and planning professional. They can help you figure out a money management strategy that stabilizes your finances despite having an unpredictable income.

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