How to manage irregular income as a freelancer

Irregular income is one of the most common reasons why people are scared of going freelance. And each time someone asks me about it I wonder why they are worried about irregularity when even their lowest income months will likely bring them more money than their last permanent job?

Why are you worried about irregularity when even your lowest income months will likely bring you more money than your last permanent job?

Managing your money as a freelancer can be very overwhelming. But if you put the right systems in place, you do a bit of work once and everything else happens automatically.

Irregular income isn’t the problem

If you think of big companies like Amazon or Facebook, they also deal with irregular income. And despite their revenue fluctuating each month, they still manage to pay their staff and cover company bills.

Why is that? Because they have several income streams and know how much money is definitely coming in and how much is likely coming in. And they also know how much things cost them.

If we look again at Amazon: Subscriptions like Amazon Prime allow them to know a definite income. Yes, the people that sign up each month, or unsubscribe will vary. But they have data from previous years, so they can make good guesses of when people sign up (I assume just before Christmas) So there is certain revenue coming in from that business model.

And on top of that, they also have additional revenue based on the amount of items people order.

How to control your income

So if big companies and other freelancers manage irregular income on a regular basis (see what I did here 🙃) you can do it too.

By now you have probably realised that irregular income isn’t really the problem. The problem is when there is no income or if there’s cashflow issues and you can’t cover your expenses.

In this article, you will learn a few techniques to help you manage irregular income.

The real problem is cashflow

What is cashflow? It’s basically the money that comes in versus the money that goes out of your company. If you don’t have enough money coming in to cover the costs of everything that goes out, that’s where the problem lies.

The problem isn’t irregular income, it’s cashflow

The same way you might have irregular payments coming in each month, you will have different expenses to pay for too. Some will be fixed, like your Adobe or Figma subscription if you’re a designer. And other costs will depend on circumstances, like sub-contractor costs which only accumulate when hiring a sub contractor.

The problem starts when you can’t cover your expenses because one of your clients hasn’t paid their invoices or you didn’t consider upcoming payments like your taxes.

Here’s what you can do to make your irregular income regular

Separate your company and your personal finances
Start building a buffer
Analyse your income
Analyse your expenses
Put your money into buckets
Calculate how much you need
Set automated payments to your personal bank account
Put money aside for taxes for your personal account.

1. Separate your company and your personal finances

If you haven’t set it up already, I highly recommend to set up a separate bank account for your business. It’s mandatory to have a business account when you work with a limited company, but if you work as a sole-trader, I still highly recommend to have a separate bank account for all the money coming in.

This way you will think of your company money differently. If you personally pay £500 for an online course, it might sound like a lot. But if you pay for it from your company, expense it as training (and therefore pay less tax) you will also see it as an investment with a good return of investment (ROI).

2. Start building a buffer

This is especially hard when you just get started. But once you got a few invoices cleared and covered your company’s costs (software, hardware, accountant) set money aside for your ‘shit happens’ fund. Don’t spend all the money that comes into your account. Keep a buffer, you never know when you need it.

I currently leave about 3 months worth of revenue in my bank account for cash flow. This way I can be certain that once my salary, dividends and sub-contractor costs as well as expenses (hosting, software etc.) are covered.

When shit hit the fan

Only a few months ago, I had a little scare. One of my clients hasn’t cleared their invoices for 2 months but I’ve already paid my sub-contractor which caused issues with cash flow and I was in a bit of a wobble.

I do have a bunch of money in my company account but it’s in a fixed savings account (the money I set aside for taxes) so I couldn’t access it.

Luckily, I have one client that usually pays within a week, even though they have a months time. So it turned out okay in the end. But if they would’ve just paid one day later, I would’ve been in trouble.

3. Analyse your income

If your income fluctuates, that is fine. Celebrate the good months. Learn from the low months. But also, see why those months are good or bad. Did you do something differently? Where did those clients/projects come from? Can you create more of those leads in the future?

Try to find patterns. In the last 4 years of freelancing I noticed that demand fluctuates, especially in the UX freelance market. Christmas and summer is usually quiet, likely because people are on holiday. Things pick up around March/April when the new financial year starts and people receive their budgets.

But also, the last few years are probably not the best ones to use as a foundation, because demand has been extremly high over lockdown.

4. Analyse your expenses

Review your expenses regularly. I usually do a clean out over the Christmas holidays where I analyse what subscriptions I’ve used in the past year and if there are any cheaper/better alternatives.

It’s probably better to review those expenses more than once per month.

Consider your time out of office

When you analyse your expenses, have a look if you find any irregularities. There might be some months where you earn a bit less. For me, that’s the case when I’m going on holiday, since us freelancers only get paid if we work.

I miss paid annual leave, but hey, this is why we have a higher day rate, to cover for things like that.

Some months you might have more expenses than usual. My situation varies a lot because I’m a digital nomad. So I’m not having the same costs each month. If I’m staying in Thailand, rent, food, gym memberships etc. might accumulate to about £800/month. While I stayed in Lisbon, that quickly added up to around £3,000 (yes, Lisbon accommodation prices have skyrocketed and booking a separate coworking hasn’t helped 😅) but across the year, there’s a good balance and I’m not spending that much.

Make sure you have enough of a buffer (see above) to cover for the months where you have higher expenses.

5. Put your money into buckets

Organising your money to make sure everything is covered (expenses, taxes, salary etc.) is important.

Some bank accounts make this quite easy, like Starling and Monzo. Highly recommending those. Personally, I use Starling for my Limited company account and their customer services is very fast to respond, you can do everything on the app and it’s very straight forward to use.

How much should I put aside into each bucket?

This varies based on your needs and goals. But 20% of your revenue should go straight into a bucket for the tax bill. Do not withdraw that. You don’t want to face a situation where the tax bill arrives and you realise you can’t cover it. You only have to pay 20% on the income, not on your revenue, but putting 20% of your revenue aside means that you’re definitely covered and anything that’s left over is a little bonus.

If you want to learn more on how to budget your freelance income (both from your company account as well as your personal account), have a look halfway through this article.

6. Calculate how much you need

How much do you want to earn per month? And how much do you actually need? This is about your personal costs, not your company’s costs. Have a look at your fixed costs, like rent, food and everything you need. Then double that. This should pay you enough to cover the minimum as well as nice to haves (eating out, holiday money etc.) and some extra cash to add to your personal savings (ideally you’ll have an ISA or LISA or both).

Once you know how much you want to earn per month, we can look into how to turn that into “regular income”.

7. Set automated payments to your personal bank account

Once you’ve finished the step above, schedule those payments from your company’s bank account to your personal bank account.

Consider your business structure

If you’re working as a sole-trader, you can pay yourself a set salary. If you’re like me and work with a limited company, you will be better of paying yourself a mix of salary and the rest in dividends.

Currently, I’m paying myself a salary of £xxxx which is the most tax efficient amount according to my accountant (I highly recommend her, if you’re looking for someone, just contact me and I’ll give you her details. We’d both get a month for free as well once you onboard.)

And if I need anything more than that salary — and if you’re based in the UK chances are you will — set up automated payments from your dividends.

Make sure you’re aware of the different tax brackets. If you pay yourself more than xxxx dividends you’ll have to pay more tax. And if you get any dividends outside of your own Ltd, this counts towards the same amount.

8. Put money aside for taxes for your personal account

This one is only relevant if you’re working with a limited company, so skip this paragraph if you don’t.

But you might ask yourself: “I’ve already paid taxes, why do I need to put more money aside for taxes?”

Well, the sad thing is, the taxes you paid are your company’s taxes. The salary and dividends you draw will be taxed personally. So there’ll be another 8.75% (if you’re in the basic rate) on dividend income to pay and depending on how much salary or dividends you draw, that will add up too.

Talk to a financial advisor

I’m not a financial adviser, I’m just a freelancer who is talking about her own personal experience and learnings. Please seek financial advice or ask your accountant for more information.

Arlight, this is it. This is how you manage your irregular freelance income, even when it’s different each month.

If you made it this far, thanks for reading, I hope you got some value out of it. If you want to learn more about freelance finances, check out Financial Freedom for Freelancers (FFF), the 7 buckets you need to fill to make the most of your finances.

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