Coping with Fluctuating Freelance Income

With a regular day job, you always know how much to expect on payday based upon your salary. You can build your budget around those steady paychecks and set up as many automatic payments for your bills as you like.

Except for getting up before the sun rises to fight traffic and dealing with office politics, it's a comfortable arrangement.

In the wonderful world of freelancing, each day is a potential payday. On the surface, the idea of having several paychecks each month is a thrilling prospect, but the reality is more of a nail-biting adventure each time bills are due. It's payday and client invoices remain outstanding. Worse still, you don't have enough work. Whether you find yourself in this situation or not, now is the time to plan for when those lean times head your way.

Freelance Payroll Philosophy

When the payment for that large invoice arrives, a number of thoughts may run through your head. Relief that you can make rent might be the first if it's been a slow month. Next, you may entertain thoughts of a dinner out or a trip to the movies. While you're out, perhaps you can stop by your favorite store and pick up a little treat.

Squash those thoughts before they go any further. Except relief. That one's ok.

Even if you're the sole employee of your freelance business, you need to train yourself to think like any other employer. Select the frequency with which you'll pay employees and how much you pay on each payday. Then stick to it.

If you don't have a separate account for your business income and expenses, it's time to correct that. Although sole proprietors have a bit more wiggle room with how they handle accounts, you don't want to get into the habit of treating your business account like your personal piggy bank. Besides, the co-mingling of business and personal funds is major no-no and you can bet the IRS will do more than give you a time out for it.

Freelance Saving Philosophy

The time-honored tenet of paying yourself first by setting 10 percent aside in savings no longer applies to you. Your new goal is to fund two savings accounts. The first is the standard account where you put away your 10 percent from each project. If you have this account already, you're ahead of the game.

Every freelancer, regardless of experience or tenure needs a separate emergency account to supplement income. This doesn't mean it becomes your vacation fund when you don't use it or helps pay the plumber when the pipes burst. You draw from this account for those times when you cannot make payroll. That's it.

Period.

Freelance Budget Philosophy

All right, everyone take out your budgets. (I'll pretend I didn't hear you say you don't have one.) If you have an established emergency savings account to supplement your payroll when your freelance income is fluctuating downward, you may not require drastic change. However, if being short on even one payday will throw your finances into chaos, this next part might be...unpleasant.

Review every expense over the last month-excluding any unusual holiday expenditures you may have-and scrutinize every line item on your budget. When you have a fluctuating income and no financial safety net, it's time to separate the actual necessities from the luxuries. No one's implying you must live on Raman noodles until you build your savings, but that daily trip to Starbucks is worth a second look.

In essence, you must decide what you need in order to function. As a freelance writer or web developer, you clearly need a reliable internet connection in addition to the basics of food, shelter, running water and electricity. Premium cable, on the other hand, is a different story, regardless of what your teenager says.

Those of us who live in dual-income households may not need to pull out the Samurai swords when we make cuts to our budgets. Trust me; I know how lucky I am to have someone else bringing home a paycheck when a client misplaces a hefty invoice. In this situation, determine how far your partner's income will stretch. Perhaps you still must earn half the household income, but there's something nice about knowing you can pay the mortgage and keep on the lights while you hunt down your missing pay.

Beyond everything else, the most crucial way to cope with a fluctuating income is to behave as though it's steady. Pay yourself only what you need to survive in the awesome income months and use what's left to help float you through the dreary income months. As long as you keep sight of the big picture, the lean times aren't quite as dark.

Well, as long as you remember to pay the light bill, that is...