If you’re a gig worker or otherwise self-employed, you may envy your friends who are employed full-time when it comes to creating a budget. They typically know how much money they bring in and when it’s coming. You don’t, and you may think, therefore, that it’s impossible for you to make a budget. But it’s not—it’s just more challenging. In fact, because your income and expenses are always fluctuating, budgeting is even more critical for you than for your friends who get W-2 statements.Financial experts don’t agree on the optimal way to budget. Some suggest using percentages, like the 50/30/20 rule. Others like the zero-based budgeting method, where your income minus expenses should always equal zero. There’s even a “pay yourself first” school of thought, where you take out money to work toward your savings goals and feed your emergency fund before you plan any expenses.Regardless of whether you follow a money-management system, these 15 tips for budgeting help when your cash flow fluctuates.1. Estimate Your IncomeRachel Lawrence, head of advice and planning for Monarch (one of the best personal finance apps) and a self-employed Certified Financial Planner (CFP), recommends estimating your income before you start trying to balance that with expenses. Lawrence has three suggestions:Estimate your income based on your financial history. Either collect bank statements from the last couple of years, or use a personal finance app that lets you connect to online financial accounts and import cleared transactions. That way, you can see all the transactions coming into all your accounts in one place.Take any seasonal spikes and dips into account. Estimate the minimum amount you’re expecting. “[That’s] the worst-case scenario for workers in the gig economy,” Lawrence says.2. Figure Out Your Target IncomeEven though your income might change every month, you can come up with a target income number, meaning the minimum amount you’d like to earn to adequately cover your expenses. Lawrence recommends using these four categories to figure out your expenses:Fixed expenses—what you have to pay every month, such as rent, a mortgage payment, utilities, insurance, subscriptions, and business expensesNon-monthly expenses—annual or semi-annual financial commitments like car registration and property taxes, or upcoming planned expenses, like car repairs or a trip (large future expenses can be broken into smaller, monthly budget items) Flexible, or variable, expenses—things like groceries, gas, personal care, and shopping. You can estimate here based on history, or based on what you’d like to be spending.Future expenses—the amount you want to use to pay down debt or to set aside for savings and investmentsAdd up the four categories to get your target monthly income amount (after taxes and business overhead).
(Credit: Monarch/PCMag)
3. Budget for Income TaxesYou’re required to pay quarterly estimated income taxes to avoid penalties and an unmanageable tax bill come April. There’s no easy way to estimate what your tax liability might be for three months. It’s an educated guess. Some quarters you’ll have low income, while in others you might get an income bulge. So your payments will most likely be different each time, meaning it will be very difficult to budget that line item a year in advance (if you’re doing annual budgeting).”Part of running your own business is making forecasts, smoothing income and payments, and especially making sure your quarterly estimates cover your eventual tax liability,” says Terry Savage, a nationally recognized expert on personal finance, the economy, and the markets.The IRS offers some help in Form 1040-ES. There’s a worksheet, tax schedules, and information on payment options.You will undoubtedly have business-related expenses that you can deduct on IRS Schedule C. Even if your company is very simple and doesn’t have product inventory, you should still be able to deduct purchases like office supplies and your technology tools. If you’re a rideshare driver, you should be tracking vehicle expenses. These potential deductions must go into the mix when estimating your quarterly taxes. (Quicken Classic is the best personal finance app for tax planning.)
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4. Build an Emergency Fund and a BufferCreating an emergency fund and building a financial buffer are hard tasks for workers on a limited income, but they’re critical ones. Budget small deposits as part of your monthly fixed expenses. Having some emergency savings is important enough that you might consider taking on extra work for a while to get that cache started.How big of an emergency fund do you need? Lawrence recommends aiming for two to four months of income as an emergency fund. If that’s out of reach but you can swing $1,000, start there. Deposit it in an interest-bearing savings account connected to a checking account so you can access the funds quickly if you need them. A buffer account is a little different from an emergency account. Think of it as a place where you keep two to three times your target income, and which you draw from during months when your earnings fall short of your target amount. There’s a very simple way to fund it. Any time you make more than your target income, set aside the extra into the buffer account. Make sure your buffer account is directly connected to your primary checking account.5. Adjust Your BudgetDon’t give up when you spend more than you earn. Everyone who creates a budget has to continue to adjust it based on, well, reality—a medical emergency, a car that needs repairs, a job that didn’t materialize.”It’s important to constantly adjust your plan. That’s part of the learning process and progress,” says Jesse Mecham, the founder of YNAB (You Need A Budget), a PCMag Editors’ Choice winner among personal finance apps for budgeting. YNAB requires some study and regular attention, but it’s built on a smart philosophy and offers a unique set of tools and more flexibility and advanced features than many competing apps.Mecham says YNAB is an especially good tool for gig workers and self-employed individuals who might not be bringing in a lot of money yet. “YNAB is especially helpful for managing variable income,” he says. “It teaches you to only deal with the money you have right now, not potential future income.”6. When Your Budget and Adjustments Fail, CutThe time will come when you have low or irregular income, your buffer account runs low, and you just can’t add any more work to your schedule. When that happens, find places to decrease your expenses. Commit to minimizing expenses wherever you can, and don’t think about how little you may be saving by using one coupon. It all adds up.Keeping in mind that you probably won’t always have to live this way, here are some suggestions:Economize on food. Eat out only as an occasional social event, and skip expensive coffee and other non-necessities. Buy generic brands and shop at discount grocery stores. Entertain yourself on the cheap. Look for free activities in your community. Use a public library for books and movies, as well as e-bikes, hot spots, and tools . Cut back on the streaming services. (Personal finance app Rocket Money can cancel them for you, though it takes a cut of your savings.)Minimize utility costs. Be economical with your thermostat. Run the washer, dryer, and dishwasher only when you have full loads. Maintain your HVAC systems and clean the filters on smaller air conditioning units so they run efficiently.Spend less money on insurance if you can. NerdWallet has how-to articles for lowering home insurance and car insurance. The app also helps you comparison-shop. Do you have low-cost transportation options, like riding mass transit, carpooling, bicycling, or walking? Reduce your costs there if possible.Sell things you don’t want or don’t use anymore. Everyone has some. Declutter, and be ruthless about it. When you need to buy something, see if someone is giving it away in a “buy nothing” group (Facebook has some of the most active communities for that), or shop second-hand.
(Credit: NerdWallet/PCMag)
7. Avoid Carrying a Credit Card BalanceIt’s tempting to spend using a credit card and not pay off the balance in full. And in an emergency, you may have to resort to it. But credit card interest rates are high, and living on credit is not a financial plan. If you must use your credit, pay the balance as quickly as possible and move on. Don’t beat yourself up over it. 8. If You Must Use Credit, Get the Right CardThere are good credit cards to be had, and when used responsibly, some come with decent perks and benefits, like fraud protection and cash-back offers. Read reviews online before accepting an offer for a new line of credit. Intuit Credit Karma and NerdWallet are excellent and free places to do this. Additionally, both Credit Karma and NerdWallet let you import online transactions from your banks so they know enough about your financial situation to make recommendations for credit cards and other financial products. You can even search for credit cards by criteria important to you, like low interest rates.
(Credit: Credit Karma/PCMag)
9. Keep a Close Eye on Your Credit ScoreIf you do gig work or are otherwise self-employed, you need to keep your credit score as high as possible in case you need to apply for more credit, get a loan, or find investors. You already have one strike against you because of your job status, but a good credit score is gold, and it makes it cheaper to borrow money.You can look up your credit score in numerous places for free, like WalletHub, Credit Karma, and NerdWallet. They tell you why your score is what it is and how you might improve it. If your TransUnion credit score is 619 or lower, you can take advantage of Intuit Credit Karma’s Credit Builder program, which is a combination of a line of credit and a savings plan that helps you build credit while saving money.10. Pay Yourself FirstIf you’ve been self-employed for years or managed to luck into a gig where you’re making decent money, you have more room to breathe than a newly minted entrepreneur. So you can afford to pay yourself first.
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“It’s trite but true,” Savage says. She recommends setting up an IRA at a place like Fidelity or Vanguard, and having them automatically take out a few hundred dollars a month for regular contributions. “If you’re under age 55, just buy the S&P 500 stock index fund,” Savage says. “And keep contributing even when market headlines say, ‘Bear!'” Eventually, she says, those shares you bought at lower prices will bring huge rewards. According to Savage, there has never been a 20-year period where a broad investment in large company stocks with dividends reinvested has shown a loss.Monarch’s Lawrence has another suggestion for self-employed individuals who are making good, steady money and want to pay themselves first: Create your own paycheck. You could form an LLC or S Corp, for example, and set up your own payroll system. “But don’t set up a regular payroll for yourself if you’re not sure you’re going to be able to pay it,” she warns.11. Get a Good Tax Advisor for Your BusinessThe small amount you pay a smart tax advisor is worth the additional perspective, Savage says. Sure, you could prepare and file your taxes yourself. “But a good CPA will give you new ideas for saving money and growing your business,” she says.12. Use a Personal Finance App”Budgeting doesn’t just happen,” Savage says. “You need a program. It’s like following a diet.” Savage highly recommends Quicken Simplifi, one of our Editors’ Choice winners. (You can read all our reviews of the best personal finance apps here.)”Not everyone trusts technology, but everyone needs financial organization,” she says. That’s good advice no matter how little money you bring in.
(Credit: Quicken Simplifi/PCMag)
Using a personal finance app when you’re living paycheck to paycheck, and especially when you’re self-employed, requires discipline and time. “You have to log in almost every single day,” says Lawrence. “You have to categorize every single expense that you have.”13. Treat Yourself Once in a WhileEvery so often, allow yourself to buy something that doesn’t cost too much and that brings you happiness—especially in the first few months of trying to stick to your budget, because it can be so discouraging. Keep in mind that a budget is always a work in progress.14. Don’t Quit Your Day JobIf you haven’t yet made the jump from full-time employment to self-employment, consider it with caution. “You’re not only doing all the work of the job, you’re also doing all the administrative work,” says Lawrence. The extra tax burden can be crushing, as can the constant financial uncertainty. It’s not for everyone.15. Change Your Thinking About BudgetingYNAB’s Mecham believes people often have to unlearn some deep-seated beliefs about money—beliefs that can be a significant source of anxiety. “Budgeting isn’t about restriction; it’s about freedom, choice, and self-actualization,” he says. “It’s more than just a budget—it’s a tool for creating the life you want.”
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About Kathy Yakal
Contributor
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute! After working at Lawson Associates, now Lawson Software, I switched my focus to accounting but learned that personal computer applications were more progressive and interesting to cover than mainframe solutions. So I served as editor of a monthly newsletter that provided support for accountants who were just starting to use PCs. I still ghostwrite monthly how-to columns for accounting professionals. From there, I went on to write articles and reviews for numerous business and financial publications, including Barron’s and Kiplinger’s Personal Finance Magazine.
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