Regulating your finances on an irregular income.
Do you know that, according to the MBO Partners’ 2014 State of Independence in America report, roughly 40 percent of U.S. adults in the workforce currently work or have worked as an independent contractor?
Self-employment can offer a number of great advantages — like freedom in how you allocate your time and choose the projects you work on — but it can also mean you aren’t always taking in a steady income.
If you’re without a regular paycheck, here are 8 tips to help you manage your cash:
- Estimate and track your income and expenses: Estimate your annual income by averaging how much you made in the past 12 months — or, for a more conservative estimate, multiply your lowest-ever monthly income by 12 — says the Freelancers Union. Once complete, list your monthly expenses to complete your budget. As you do so, check out Mint’s budgeting tips for freelancers.
Tip: Online tools like Mint.com or, if you’re a BMO Harris accountholder and use BMO Harris Online Banking®, BMO Harris Total LookSM can help you keep track of your accounts (even if they’re not all with us), income and expenses. As you get started, consider 5 steps to estimate what money you’ll have on hand — and where the rest should go.
- Find ways to cut costs: Reexamine your monthly expenses to see what cuts you can make. For example, take a hard look at things like your cell phone package and cable TV plan — can you reduce your minutes, downgrade the number of premium cable channels you have or ditch cable altogether? Additionally, consider these 5 ways to cut costs and save hundreds of dollars at home and 9 easy steps to using coupons.
- Pay off outstanding debt: If you owe money on a car or carry student loan or credit card debt, high interest rates can mean you’re losing cash. For example, if you owe $3,000 in credit card debt at a 19 percent interest rate, you’ll pay hundreds of dollars in interest each year. It’s important that you pay on time, too. You don’t want to incur late fees, which can negatively impact your credit score. Even on a limited income, there are ways to manage and consolidate student loans.
- Take advantage of tax breaks: Without an employer contributing part of your Social Security and Medicare contributions, you pay both, along with any income tax you owe. However, self-employed workers can deduct a number of business-related expenses, including home office costs, equipment and health insurance. You’re taxed off your net profit — the total amount you make, minus all your expenses — so the more you can claim, the smaller your tax bill. Keep all receipts and pay careful attention throughout the year to what you’re spending money on. Check out the IRS’ tax center for the self-employed for detailed information.
- Pay taxes quarterly: Think you’ll owe more than $1,000 in taxes this year because you’re self-employed? You may need to pay your federal taxes each business quarter (April 15, June 15, September 15 and January 15), or face a penalty — from 6 to 8 percent of what you owe for each day your taxes weren’t paid, according to Nolo. Some exceptions apply, so use the IRS’ Form 1040-ES Estimated Tax for Individuals to confirm you need to pay quarterly, or check with a tax professional. U.S. News & World Report recommends setting aside 30 percent of each paycheck. Check the IRS’ state government websites to see if your state also requires you to pay an estimated quarterly tax.
- Create a cushion: Your income will likely vary from month to month, so it’s a good idea to have money in the bank as you manage income ebbs and flows, and plan for a potential emergency. Financial experts differ on how much to set aside — suggestions range from saving three to six months or even eight months of household expenses. Save as much as you can, but have at least enough for a month or two, in case you hit a dry spell or emergency. You can start your emergency fund with as little as $10 a week.
- Contribute to a retirement fund: It may seem a long way off, but you’ll need approximately 70 to 90 percent of your income to maintain your standard of living after you retire, according to the U.S. Department of Labor. Learn which of these four retirement plans — 401(k)s, simple IRAs, SEP IRAs or profit sharing — will work best for you.
- Line up more work: Check out Inc.’s small business marketing ideas for tips on boosting business. And when you land a new client, review AOL Jobs’ list of things to look for in an independent contractor agreement before signing on the dotted line.