Budgeting for Freelancers

How to save and invest on a fluctuating income

SAN MATEO, Calif., Aug. 16, 2006 - Standard advice about how to save on a seemingly stretched-to-the-max income often starts with one basic tip: Trick yourself into saving by using direct deposit and having a portion of your income diverted into a savings account. But what about the more than 12 million Americans who are self-employed in non-agricultural businesses? Many self-employed people - from business owners to students who freelance part-time to full-time consultants - do not have traditional employment benefits like direct-deposit paychecks, explains Brad Stroh, co-CEO of Bills.com. "Many of these hard-working people have income that fluctuates from month to month," he explains, "making it harder to establish any type of regular savings plan." People whose income fluctuates need to learn to adopt a longer-term view of finances than someone with a regular paycheck coming in each week or month, says Stroh. Generally, after a few years of fluctuation, people can observe patterns - a slump around the holidays or in the summer, for instance - as well as determine a typical monthly minimum income level. Then budgeting, spending and saving can be done with that "base" in mind. Bills.com suggests six other tips to help earners with irregular incomes establish a routine savings plan:

  1. Set baseline goals. A self-employed individual could establish an absolute baseline of sufficient savings to cover expenses such as quarterly estimated self-employment taxes and an emergency fund. Common wisdom suggests keeping six months' living expenses in an emergency fund at all times. For those with fluctuating incomes, this fund can become a "floating" fund to pull from during leaner times, then replenish when income increases.
  2. Try "zero-based budgeting." Everyone has fixed monthly expenses such as rent/mortgage, as well as consistent variable expenses (those that occur each month, but fluctuate, such as food and some utilities). Some people accumulate savings by holding off on discretionary purchases until they achieve a certain level of savings. Then, continue to save and allocate a portion of that savings toward a planned seasonal purchase.
  3. Stick to a percent. With each check received (whenever that is), set aside a pre-determined percentage, based on your budget, for savings and investment.
  4. Sock away windfalls. When you earn or receive extra money (from a larger client check, a gift or activities such as a yard sale), save rather than "blow" the excess money. Once you are used to living on your budget, chances are good you'll actually feel more comfortable if you stick to that budget. If you stash the "extra" - in addition to the regular pre-determined amount - you'll see your savings soar.
  5. Bill yourself. Take advantage of automatic deduction plans you set up. Some financial institutions let you arrange automatic withdrawal from your checking account to a savings account. Record this expense like a bill every month to painlessly accumulate savings. If necessary, start with a small amount like $25 or $50 per month and increase it whenever possible - when you pay off a credit card with a $50 monthly payment, increase your savings by that $50. With the same outflow you have today, you'll be paying yourself.
  6. Save like a pro. Don't just keep savings in your spending account with a mental note that they're "saved." Instead, put them in an investment or savings vehicle you've selected. If you don't want savings tied up for the long term, you might choose a money market account that allows withdrawals only at certain minimum levels. Or purchase short-term CDs (three- or six-month terms) on a regular basis. The strategy will provide some interest earnings and force you to constantly reinvest.

"Whatever method you choose, do save, and do so on a consistent basis," advises Stroh. "Chances are good that you'll be surprised - and inspired - by the way your funds accumulate." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com's partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 7,500 customers nationwide and managing more than $250 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.