Having a fluctuating income can make managing your money and saving for the future especially tricky.
Whether you're a freelancer taking part in the gig economy or an entrepreneur with a small business, learning how to manage income that varies from month to month is crucial, especially considering the gig economy is expected to grow.
The statistics paint a very clear picture:
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- The number of freelancers could grow from 76.4 million this year to 90.1 million in 2028, according to Statista.
- The global gig economy could grow from $355 billion in 2021 to $1.9 trillion by 2031 at a 16.18% compound annual growth rate (CAGR), according to Business Research Insights.
- There are 33.3 million small businesses in the U.S., accounting for 99.9% of all companies, according to the Small Business Administration.
So if you’re a freelancer or small-business owner or plan to become a freelancer or start your own business, here are eight financial management tips from business experts for how to deal with income fluctuations.
1. Track income and set a flexible budget.
If you track your income, you can set a flexible budget to meet your needs and wants, regardless of how much you earn. Monitor your income for the next six months to discover the range of your earnings. That allows you to set your monthly budget to cover all your expenditures. You might find you can even afford to take a break without breaking the bank.
Thomas Medlin, co-founder at JumpMD, shares how his team initially struggled with their finances at the onset of their intelligent health care referral software business: "It was difficult to find potential clients who'd avail of our products and services, more so to establish a consistent income. So, we tracked our income and expenses for the next six months and managed to set a flexible budget. And the rest is history."
2. Have multiple income sources.
Having a fluctuating income from only one source can be pretty scary because you lack a financial backup when there’s an emergency. So, whenever possible, it's best to have multiple sources of income.
Sure, you can have the highest-paying job even without a degree. But what if you lose it without warning? Side hustles can help you diversify your income.
Sergey Taver, marketing manager at Precision Watches, recommends taking advantage of the gig economy: "Since the pandemic, we've hired freelance contractors who can handle various facets of our business, like marketing and advertising. And we've learned that most of these contractors handle multiple freelance jobs with various clients. That allows them to survive and thrive financially — the reason why the gig economy is booming!"
3. Build your emergency fund.
The key to building your emergency fund is to multiply your monthly budget by six. Should an emergency strike, you can survive for the next six months.
This financial trick is especially helpful for those with income fluctuations. Suppose you're a freelancer being paid per hour but have managed to work for only a few hours due to sickness. With an emergency fund, you have a financial backup to cover your expenses.
Derek Pankaew, founder of Listening.com, makes the case for having an emergency fund: "It's something you should prioritize, especially if you have an inconsistent income. As you don't know exactly what's going to happen for the next few months, always stay on top of your finances. Remember, emergencies can strike anytime, so better be financially prepared than sorry."
4. Save money regularly.
Once you've built your emergency fund, you must consistently set aside money for savings. No matter what you earn or whether your income fluctuates, make saving part of it a financial habit, as it can pay off in the long run. You should save at least 10% of your total earnings on a regular basis. A wealthy mindset always prioritizes savings over expenses.
Logan Mallory, vice president of marketing at Motivosity, promotes the value of savings, whether on a personal or business level: "No matter how regular or irregular your income is, you must save for the future. It's not about depriving yourself of your needs and wants; it's about knowing what to prioritize. Ultimately, you'll develop good financial habits that will make a difference in your finances and life in general."
5. Invest to grow money.
Once you've established your emergency fund and are saving consistently, it's time to take your finances to the next level. Consider investing, whether through stocks, bonds or real estate investment trusts (REITs), to grow your money. You can even get insurance to protect yourself from financial losses.
For example, invest in a 529 for your children's education if you’ve started building your family. To save for retirement, consider signing up for your employer’s 401(k) plan or creating a SEP IRA or a solo 401(k) if you’re a freelancer.
Grant Aldrich, founder of OnlineDegree.com, advises diversifying your investment portfolio: "Investment is still a risk at the end of the day, so take a calculated one. Even if you have an emergency fund for financial backup, you still want your money to grow over time. It's best not to put all your eggs in one basket; distribute all your financial resources to minimize your financial risks."
6. Manage your debts wisely.
In financial management, the message is clear: Avoid debt whenever possible. But of course, debt is sometimes inevitable, especially if you have fluctuating income. So then your goal should be to pay it off as soon as possible. You might also consider the option of debt consolidation.
Brooke Webber, head of marketing at Ninja Patches, highlights the value of debt consolidation: "If you are spiraling into a financial abyss due to several debts, (consider applying) for a favorable loan with a lower interest rate. Use the lump sum to settle all your debts so you'll only have one loan to pay off."
7. Cut expenses and earn extra income.
Key to managing fluctuating income is to earn more than you spend. One way to help with that is to cut your monthly expenses, such as by eliminating subscription services you’re not using and making coffee at home rather than stopping at Starbucks.
You could also get an energy audit to find ways to boost your energy efficiency and save on utility bills.
On the flip side, there are many ways to earn extra cash to help boost your income and cover your expenses.
Jerry Han, CMO at PrizeRebel, recommends getting online jobs that capitalize on your interests and passions to supplement your income: "If you have a knack for writing, you can take freelance content writing or copywriting jobs. Also, join affiliate marketing by promoting products on social media and getting commissions. Or, if you have an entrepreneurial mindset, you can build your online store via an e-commerce platform."
8. Plan for the future.
Finally, financial planning is a critical part of the overall equation. You should plan for the future even if your income fluctuates. The ultimate goal is to achieve financial success and stability.
Financial planning isn’t a set-it-and-forget-it exercise either. You need to revisit your financial plan regularly to adjust it for life events and ensure that it’s up to date.
Sturgeon Christie, CEO of Second Skin Audio, makes the case for constant financial planning for small businesses, which is also true for individuals: "We take financial planning seriously at our skincare clinic. We want to ensure that our business thrives in the long run by meeting our clients' needs. Also, technological advances and industry trends constantly impact our clinic, so we must keep up with these changes for continued financial success."
Wrapping up
Managing your finances can be a bit tricky if your income varies from month to month. By taking the above tips from business experts into consideration, you can rise above the financial challenges that go with income fluctuations. Not only will they help you meet your daily needs, but they’ll help you grow your money over time and set you on the road to achieving the financial security you deserve.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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