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 accompanied the onset of the pandemic has presented Canadians with a long list of 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.
On the upside, with a great number of businesses operating virtually over the past year, 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 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.
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 pandemic has meant leaner months and fewer job opportunities. But, remember to set aside a percentage of your income each month for income taxes. Having that money set aside will not only allow you to pay your taxes when they come due, 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.
Finally, remember that it’s always a good idea to perform a twice-yearly financial checkup 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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