How can I manage financially on an irregular income?

Key takeaways

  • If you are self-employed your income may be erratic, but your finances shouldn’t be.

  • Avoid using debt to fund your lifestyle while you establish your freelance, contract, gig economy or business earnings. Interest will compound against you.

  • Determine the minimum amount you can survive on.

  • Set aside and save any additional earnings above this amount. Use these savings to supplement your earnings when they are below the minimum you require.

  • Wait until you are sure your earnings are more stable before you increase what you spend.

  • Save up before you go solo to support yourself during the tough first few years.

Whether you are a freelancer, a start-up entrepreneur or rely on commission or other irregular work, an irregular income can be a challenge. 

Salaried employees know what their income is and can set a budget accordingly, but when your income is erratic, it is more difficult to budget and have the cash to pay regular expenses on time.

Trying to wing it, however, can also land you in trouble and you may find yourself spending too much when times are good and dipping into any savings you need for other goals or incurring debt when times are bad.

Remember that it is much harder to catch up when you have incurred debt as the interest works against you. It is better to live frugally upfront until you are sure your business or freelance income can sustain a higher standard of living.


What to do when you start earning

Once you start earning from your services or business, consider the following:


1.  A separate bank account for your business income and expenses

Setting up a separate bank account for your business income and expenses will help you enormously to keep track of how much you are making from the business.

If you are starting small it is possible to set up a separate transactional account at no cost. Pay your business earnings into it and the expenses from it.

It will be much easier to keep track of your business activities for tax purposes and to know how your business is doing if you have a separate bank account.

A separate bank account will also prevent you from spending the business income on your personal needs.

Ideally you want to reach a place where you can pay a regular income from your business account into your personal account, but keeping the two separate will prevent things from being difficult to untangle.

While your business is starting up you may be using your personal cell phone, vehicle or home for your business. Determine how much of your cell phone expenses, vehicle expenses and home is a business expense and which is personal and pay the related expenses from your business or personal account.  


2.  Set aside what you may owe in tax

Check out the income tax threshold in our tax tables and if you expect you will earn more than that for the year, create a separate savings account earmarked for tax and pay the tax you owe into it each month. Do not use the money in this account for any other purpose so that you are ready to pay what you owe in taxes at the appropriate time.

If it is your first year in business and you are not sure where your earnings will end up, you will need to estimate your tax monthly.

Remember it is up to you to register for and pay the tax you owe when you start to earn more than the tax threshold.

If you were a salaried earner who is now running your own business, you will probably be registered for tax, but you may need to register to pay provisional tax.  Read more: What is provisional tax? and Should I be registered for and paying provisional tax?


The tax calculation

Let’s assume, for example, if you earn R10 000 in your first month, work out the tax you will need to pay if you continue to earn this amount for the rest of the year – that is tax on R120 000 for the year – and set aside one twelfth of this amount.

If in month two, you only earn R6000, work out the tax on the average income so far – that is R8 000 a month and assume that will be what you earn for the rest of the year. Work out the tax, divide by 12 and make sure you have two-twelfths of that amount in the savings account in which you are setting aside your tax money.

 If in month three, you earn R12 000, your average for the three months is R10 000 and so you should now have a quarter (three out of 12 months) of the tax you will pay on annual income of R120 000 (an average of R10 000 x 12 months) set aside. 


3.  Repay your debt

If you borrowed money to start a business or to keep you afloat while establishing yourself as a freelancer or professional, you need to service that debt by paying at least the minimum repayment.

Once your earnings are more secure, consider using any income you earn beyond your baseline budget to repay your debt quicker. The longer you owe on debt, the more the interest will work against you.

Interest on your debt is a business expense you can deduct from your business earnings. If you do not have enough earnings to cover the costs when you are starting out and your income is low, you may be able to carry your business loss forward to the following tax year.


4.  Pay yourself the bare minimum

If you are starting out as a freelancer, working the gig economy, an independent contractor or professional services provider or even an entrepreneur bootstrapping a start-up, start by working out the minimum amount you can live on – this is your baseline or lowest income.

Start conservatively. There is time to adjust later when you are sure your income stream is more stable.

Even if you have been given a loan or grant or someone has invested in your business, err on the conservative side when drawing from that money as you do not know how long you will need to make it last before your business takes off.

If your business or freelance career is more established, determine what is the lowest amount you have earned over the past three years or as long as you have been operating – and use that as your baseline income.

Then set aside any additional earnings you receive above that baseline income and save them so you can create a pool of money to buffer or smooth your future earnings. Saved in a separate account, you will be able to draw on those savings when your income is below your baseline income.

Your aim should be to create as steady a flow of income as you can.

Only once you have saved enough to be sure you can continuously supplement your earnings to create a more regular income and/or you can see a pattern in your earnings, should you consider drawing a higher amount and increasing your lifestyle costs.

Again err on the cautious side – consider how will you cope if you lose a contract or certain customers.

A contract or job that pays a regular amount or retainer every month will also help stabilise your earnings.

When your business is a little bigger, your earnings may be more secure as the business will retain earnings and create its own buffer for lean times and to reinvest in the business.


5.  Have some money for an emergency

Good financial advice typically suggests that if you are employed you have an emergency fund with at least three to six months of income set aside for financial disasters, with one of the worst being the loss of your job.

The same is true for the self-employed even if your business is bigger and your drawings are more secure. The unexpected, like a pandemic, can happen and can put you out of business for a period or cause a severe setback. Being financially prepared will make these setbacks easier to deal with. Read more: How do I set up an emergency fund?

It may be tempting to spend a little more when you have a big sale or contract that brings in more income. If you can resist that temptation, spend a bit of it, but keep building your buffer. Avoid giving in to the temptation of permanently upgrading your lifestyle until you are sure your business income is on a solid footing and you have reserves to tide you over any setbacks.

When you reach this stage you can rework your budget to include higher ongoing expenses and shift your lifestyle up a gear. But remember at this stage your buffer account needs to have more reserves to fund your higher lifestyle.


6.  Protect your earning ability

When you are an employee, you enjoy benefits like sick leave and group life cover. When you are self-employed or a business owner, you need to create your own employee benefits to ensure your income is protected at all times. Read more: How can I fill the employee benefits gap as a freelancer, contractor or small business owner?