How to ride the ups and downs of freelance income
If you’re a freelancer, a gig worker, or an independent contractor, or if you work in a job with fluctuating hours, you already know that large swings in income are no fun. You’re not alone in this situation. More than a third of Americans ride this income-volatility roller coaster, with fluctuations of 25% or more from year to year, according to a 2017 Pew Charitable Trusts report. This volatility makes it hard to plan ahead, save for retirement, pay off debts, qualify for loans, manage major expenses (or even minor ones), and stay within your budget. It increases the chances you’ll pay late charges, interest, and overdraft fees. It puts families in danger of food, health care, and housing disruptions. It also increases stress, and can even hinder children’s behavioral and educational development.
Amid the rise of the gig economy, income volatility is getting worse.
“It’s a much bigger problem now than it was 25 or 30 years ago,” said Ray Boshara, senior adviser and director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, in a phone interview. A variety of trends including greater volatility in company revenue passed along to employees; a weakened labor movement to fight for employee-friendly practices; and new scheduling software that allows employers to more easily implement “on-demand” scheduling may be at fault.
If you or a partner are suffering the nausea-inducing plunges and climbs of income volatility, here are some strategies to help smooth the ride.
Change things up
Not to state the obvious, but the best way to avoid income volatility is … to seek income that isn’t so volatile. That might involve getting a more diverse set of freelance clients (or at least ones that are more consistent). It might mean making a full-on switch from gig work to a traditional job. You may consider replacing an unstable or part-time job with one that has more consistent hours, or supplementing your regular job with gig work (i.e., the infamous side hustle). Granted, doing these things is difficult in a job market that, despite low unemployment figures, is still tilted in favor of employers. But make it a long-term goal, even as you work with the other strategies below.
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Start an income-smoothing fund
As I’ve said many times, everyone who is able to should be locking away money in retirement accounts, but freelancers and gig workers also need an accessible cash reserve—it could be just your personal savings account—for a rainy-day fund. Workers with volatile incomes might call this an “income-smoothing fund.” (If you’ve read my work, you’re already familiar with the three-to-six-month emergency savings fund I recommend everyone to have.)
To figure out how much of your income to park there, look back through your last 12 months’ worth of bank and financial statements. Compute how much you require each month for food, housing, health care, taxes, childcare, and other necessary expenses. If your income exceeds that outlay in any given month, divide the excess between your retirement fund and your income-smoothing fund, with just a little bit (or none, if you want to be draconian about it) set aside for spending on “wants”— things that you could really live without.
And don’t rely on paychecks alone to build a savings buffer. Your annual tax refund (you are setting aside money for taxes, yes?) is one of your best savings opportunities. Rather than use it for a splurge, tuck that windfall into your two savings pots, and you’ll be a much happier camper when you hit a dry spell. (Ask your employer if you have access to the Even app, designed to simplify this budgeting process for those with inconsistent incomes.)
What if you still find yourself with a monthly shortfall? Don’t bridge the gap with a credit card that lands you in high-rate debt or, heaven forbid, with a payday loan. If you must, check out local credit unions or fintech lenders, which may offer personal loans with lower rates and better terms. Freelancers might also look into getting a business loan with good terms. If you’re registered as a limited liability corporation (LLC), you stand a better chance at getting one.
Speak up
Raise your concerns with clients or managers. “If an employee has particular challenges, or an amount of money they have to earn every month, it’s worth it as a first step to try to have a constructive conversation with management about it,” said Charlotte Alexander, an associate professor in the Department of Risk Management and Insurance at the J. Mack Robinson College of Business at Georgia State University, in a phone interview. Even if the conversation doesn’t have an immediate effect, it can put those who cut the checks on notice that it’s an issue they need to consider. “Employers themselves are increasingly offering hardship funds,” added Boshara. “There’s a cost to their bottom line when employees have to take off time.”
Take action
There’s some good news: States and municipalities are starting to pass legislation to protect freelance workers, create portable benefits plans (benefits not tied to a particular job), and limit “just-in-time” scheduling. Find out what’s available in your region, and take advantage of it. And join in local advocacy efforts. (Remember, your vote is powerful.) “There are various policy and advocacy efforts that workers can get involved in to change the law or put pressure on companies to voluntarily make changes,” Alexander said. “And there’s always the option of unionizing.” Although it’s an uphill battle, labor organizing is catching on for workers in traditionally unstable jobs such as fast food workers, gig workers, freelancers, adjunct professors, and journalists and media professionals.
Riding the income-volatility roller coaster can produce anxiety, but careful budgeting can ease the ride. In the long term, worker-oriented legislation and increased bargaining power through unions may one day make the track smoother.
