Even during the best of times, maintaining your emotional and financial health can be difficult when you’re working in the gig economy. The income for gig workers (sometimes called freelancers or contractors) can fluctuate from month to month, making budgeting difficult and the risk of debt higher.
The financial crisis that has followed Canadians throughout the pandemic and beyond has presented many challenges. Some industries and sectors faced more challenges than others. And even though the government provides self-employed Canadians with EI (Employment Insurance) benefits, the shutdowns, slowdowns, and unpredictable economy has made it tough for many gig workers to make ends meet. Even before the added challenges of the pandemic, gig workers consistently face variable income, a lack of structure and a high potential for burnout.
On the upside, there are a great number of businesses that have converted to operating virtually over the past few years. The possibility of working with contract or distance employees may be more acceptable and more plausible to employers who previously only considered the traditional work structure of office-only employees. Many people turn to the gig economy when cash is tight or jobs are scarce, a trend seen often throughout the pandemic. A side hustle or short-term contract job offers a means for a household to deal with the rising cost of living and cover expenses when traditional employment hasn’t been reliable. Additionally, gig workers have the perks of flexibility, independence and a variety of work options.
There are steps you can take to increase your peace of mind and avoid debt when you’re a freelancer or contract worker — first and foremost is a budget. Here are some strategies to help you manage your money when your income is less than predictable.
The first step when creating any type of budget is determining what you’re earning and what you’re spending each month. When your income fluctuates, this step can be challenging. Start by tracking your expenses and income for three to six months. To ensure you’re paying down debt and setting aside money for savings each month, treat these goals as expenses as well.
Once you’ve totaled your expenses, divide that amount by the number of months you have been tracking. For example, if three months of expenses add up to $15,000, your average monthly expenses would be $5,000 ($15,000 divided by three).
Whatever budgeting method you choose, it’s important that your budget balances at the end of each month. In other words, your expenses don’t exceed your income and your budget balances to zero. One way to do deal with fluctuating income is to create three bank accounts: one for your income, one for your expenses, and one account that will be your savings buffer. Deposit all your sources of income into your income account. Your ‘salary’ will be equal to your average monthly expenses calculated in the example above. Each month transfer your ‘salary’ from the income account to your expenses account.
For example, if you calculated your average monthly expenses to be $5,000, that’s your monthly salary. On those months when your income is over $5,000, transfer extra funds into your savings buffer account. During leaner months, when you make less than $5,000, you can draw from your savings buffer to increase your ‘salary’ to $5,000.
When you’re a part of the gig economy, it can be easy to view your entire paycheque as available income—especially if the effects of the pandemic caused leaner months and fewer job opportunities. But, remember to set aside a percentage of your income each month or make a separate bank account for income taxes. Having that money set aside will not only allow you to pay your taxes when they come due, but it will also help you avoid unnecessary tax debt. It can be tempting when income is low to forgo saving for taxes, but you’ll thank yourself later.
To avoid feeling like you’re always falling behind, stick to your budget and avoid turning to debt. When work opportunities are abundant and your income is higher, consider putting more towards your debt repayment if you can. Freeing yourself from costly credit card debt or vehicle loans will eventually allow you to focus on short and long-term savings goals instead. If debt payments are making it harder to make ends meet, use our debt options calculator to compare debt solutions or speak to a Licensed Insolvency Trustee.
Along with the perks of gig work, like flexible schedules and high earning potential, are also some drawbacks. While freelancing or contract working, you will miss out on benefit plans and paid vacation leave provided by most companies to their full-time salary workers. It is wise to establish how much your annual health care needs will be and how much to save for when you want to go away for a week. You must incorporate how much these expenses will cost on an annual basis into your budget and continuously set aside a portion of your savings specifically for these items.
As a gig worker, your income will likely fluctuate month by month. Some months you may struggle to make ends meet while other months you make significantly more than a typical 9-5 job. As difficult as it may be, it’s important to remember during those good months to not overspend your recent earnings. Instead, invest that extra money into something that will be beneficial in the long term. You could reinvest that money into growing your client base, learn a new skill to add to your repertoire or, as mentioned earlier, pay off some debt.
When negotiating your gig work jobs it is important to determine who is responsible for every cost. Time, equipment and shipping are just a few costs that can easily bring your hourly earnings down from $20 to $5. The best way to mitigate the risk of a hidden cost is to have clearly written proof of the working contract. There will be times when hidden costs still arise though. To prepare, it is important to have an emergency savings fund for this type of expense. It is wise to keep a substantial amount set aside as the hidden costs can range from small to large.
Finally, remember whether you’re a gig worker or not, it’s always a good idea to perform a twice-yearly financial checkup. This will help to gauge your current financial health and help you plan for what’s ahead.
Is your debt making it more difficult to make ends meet on an irregular income? Reach out to a Licensed Insolvency Trustee for a free consultation today.
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