How to build wealth without a steady income


Jackie Lam

Jackie Lam

Blog author Jackie Lam

Jackie Lam is a money writer and educator. She helps artists and freelancers get creative with their money at Hey Freelancer.

Published September 6, 2017|5 min read

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Sure, you can squeak by financially as a freelancer, but can you also squirrel away your hard-earned cash and build wealth? Freelancing comes with extra challenges, such as managing gaps in cash flow and periods of feast and famine. It can be a tall order to think long term and save for the future. However, it’s totally doable. You just need to tweak common personal finance advice and come up with your own methods.

Here are some ways you can get past living hand-to-mouth and grow your money for the long term.

##Come up with a budget

With a bit of trial and error — and maybe the assistance of a few handy apps — you can come up with a budget that works for you. But for starters, here are three approaches:

1. Base it on percentages. Figure out what your minimum monthly expenses are, and pay yourself that set amount each month. Next, dole out anything “extra” based on percentages. For instance, you might allocate 20% of whatever is leftover toward your retirement, 50% toward your emergency fund and 30% toward your “fun” fund. These percentages are entirely up to you in accordance with what’s important to you.

This method might work best if you’re fairly new to freelancing, or your income fluctuates wildly, like many freelancers who have intense, long-term projects followed by lulls. Because I like to allocate my “extra money” toward different savings goals as I see fit, I’ve found this approach works best for me.

2. Base it on an average. This is one of the two approaches for budgeting on variable income my friend Kristin Wong recommends. Basing your monthly budget on averages is probably best if you’ve been freelancing for a while, or if your income is pretty steady.

With this method you take the average of the last six or twelve months and pay yourself a monthly income based on that number. So let’s say you made a total of $30,000 in the last six months. If you divide that by six, you get $5,000. So that’s your monthly income.

3. Base it on your lowest paid month. The other approach Kristin recommends is to pay yourself the lowest amount of money you made in the last six- or twelve-month period. While not foolproof, this helps you stay on the safe side. This might not be the best method if your income fluctuates between drastic highs and lows.

##Prep for highs & lows

Map out your projected income for the year and do a 12-month cash flow to see where your actual peaks and valleys in income are, said Pamela Capalad, certified financial planner and founder of Brunch & Budget. An unpredictable income means freelancers often live month-to-month, Capalad said. “But if you've been freelancing for a while, you will have seasons of income. Being aware of when those are will give you an idea of how to plan for the low- and high-income months.”

So if the holiday season is generally a slow period for you, plan to tap into your business rainy day fund to help tide you over. Conversely, if the holiday season is when you rake in more income, you can set some aside to put toward your rainy day fund or sock away for another savings goal.

##Contribute to your retirement once a year

Instead of making monthly contributions to your retirement account, make a yearly contribution. As long as you’re contributing by the end of year and don’t put in more than the maximum, it doesn’t matter when you save for retirement.

So if you get an influx of money at the end of or beginning of the year, you can sock that away for retirement. And for freelancers who anticipate a significant amount of income in the next year, Capalad advises they file an extension on their taxes. That way they have until October to contribute to their individual retirement accounts.

While I haven’t been perfect, I’ve tried to sock away a set amount each month toward my Roth IRA, and try to contribute an additional amount every three months toward my Simplified Employee Pension IRA.

##Don’t pressure yourself to save

If you don’t make more than the amount you need to cover basic living expenses in a given month, don't feel pressure to save, said Capalad.

“If you try to save in a low-earning month, you may end up putting expenses on a credit card — or try to play catch-up on expenses in a high-earning month,” she said. Instead, save when you can afford to.

This is something I’ve learned the hard way. There were some slower months when I felt as if I was barely scraping by because I put pressure on myself to not only to pay my bills, but save for all my savings goals.

To help me through this, I’ve come up with a few different budgets (yes, I’m bananas when it comes to budgets.) The first is my basic budget, which is what I need to cover core living expenses and a set amount I contribute to a retirement account. I also have a “deluxe budget,” which includes funds into my Health Savings Account and investments.

While it’s more challenging to build your wealth when you freelance, you can make it happen by employing a few fresh tactics and doing things a bit differently than nine-to-fivers. In time, you’ll get a better handle of your money.

Image: jacoblund