How to Budget with Irregular Income in 4 Steps
As the gig economy continues to grow, there are more opportunities for income than ever before. However, this income isn’t exactly stable and is often irregular. One month you could be earning $4,000 and $1,000 the next, or be even more erratic.
It begs the question, how to budget with irregular income? This blog will help guide you to the answers.
Rise of freelancers, digital entrepreneurs
The growth of the gig economy is changing the way we work in a significant way. It’s led to the rise of freelancers and digital entrepreneurs taking advantage of the new reality.
The gig economy is where organizations and independent workers engage in short-term work arrangements instead of permanent jobs. Closely connected with the rapid advances in technology and the trend of working remotely, this is mainly facilitated by digital platforms actively matching freelancers and customers on a payment-by-task basis.
After hitting $300bn in 2020, the global gig economy is expected to top $400bn by 2023. Today, about 36% of US workers are part of the gig economy. This growth indicates that we are witnessing a massive shift from traditional full-time employment to freelancing and part-time work.
The remote work trend accelerated during the 2020 pandemic and played a significant role in the rapid growth of the gig economy today. With lockdowns in place, employees had no choice but to work from home. According to Statista, 52% of the current gig economy workers lost their jobs because of the COVID-19 pandemic.
Freelancers have become increasingly commonplace, with employers embracing remote working. More workers are opting for the gig model, primarily because of the more flexible working conditions. Companies are also turning to freelancers to do jobs that are not directly related to their industry in a cost-effective way.
With digital entrepreneurs launching platforms like food delivery, holiday rental, ride-hailing, and remote recruitment apps, available jobs for freelancers range from driving taxis or delivering food to getting more skilled positions in content creation, data analysis, and IT fields.
For many, joining the gig economy is a lifestyle choice, but others face tough circumstances with variable incomes.
What this means for you
The proliferation of the gig economy can benefit you in more ways than one, but it’s not without its drawbacks.
The benefits of the gig economy include:
- Cheaper and more efficient services like Uber and Airbnb are available to you round the clock.
- Access to international remote jobs that give you the freedom to live and work anywhere.
- More earning potential. You can take as many jobs as you can handle.
- Flexibility to choose when to work and spend more time with your loved ones.
While the drawbacks of the gig economy include:
- Lower pay due to increased competition. Employers have more options to choose from globally.
- Disruption of your work-life balance, sleep patterns, and routine. You need to be available for gigs at all times rather than your regular 9-5 workday.
- Difficult career growth. Building your career may prove difficult as you may have to take on gigs in different industries to survive.
- Unemployment insurance usually doesn’t cover gig workers who can’t find employment. However, an exception has currently been made with the 2020 CARES Act.
- Lack of financial security and income predictability. You will find yourself constantly hunting for your next gig, and that may take its toll on your financial and overall health.
Considering joining the gig economy? You should give it serious thought and think about its impact on your financial planning. Knowing how to budget with irregular income is one of the biggest sources of headache for gig workers.
How to budget with irregular income
Proper budgeting is vital to your survival in the gig economy. But it can prove rather tricky when you can’t predict your income. Learn how to budget with irregular income using these four tips.
Estimate your average income and prioritize your expenses
Setting up a budget starts with having an idea of how much money you’re expecting. While it may be difficult to know that for sure, you can estimate how much you expect to earn. Start tracking your income and expenses by logging every transaction. You can do this manually with a pen and paper, a financial app, or by pulling data from your bank statements.
Having accurate data on both your income and your expenses lets you estimate your average income. It also helps you know how much you spend monthly and on what. Simply divide your total income for six months by six to get your average monthly income.
To help you stay within budget, analyze your expenses and make cuts where possible. Remember to prioritize your needs over wants. Learning how to budget with irregular income is pointless if you’re not willing to make sacrifices.
Set up a zero-based budget
Zero-based budgeting is a method of budgeting in which all expenses must be justified and approved for each new period. It’s the most practical method for people looking for how to budget with irregular income.
This strategy allocates every single dollar you earn to a specific expense. Your goal is to have every dollar spent, saved, or invested at the end of the month. The zero-based budget can help you prioritize where your money goes.
For example, suppose your average income is $2,000, and your monthly expenses total $1500. In that case, you may allocate $1,500 to your expenses and $500 to savings and investing. On months when you make more money, you can allocate the excess to your savings and investing category. You should also add all irregular expenses to a miscellaneous category in your budget.
Start an emergency fund
The fact that you’re learning how to budget with irregular income is the confirmation that you need to start setting up an emergency fund immediately. An emergency fund is money you’ve saved to help you cover unexpected costs that come with everyday life. The emergency could be a medical emergency or home repair.
Plan and save up an emergency fund of about three months’ worth of expenses to help mitigate the financial stress when emergencies happen. Your life might depend on it.
Build wealth with investing
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Understanding the gig economy, its impact on your life, and how to budget with irregular income will help you make the best decisions on your journey and significantly improve your financial health.
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