Coping with Irregular Income

One of the big trends that has been going on in employment is the shift from regular income (like bi-monthly paychecks) to irregular income.  Freelancers, people who get paid commissions, those with a substantial amount of variable compensation, and those in industries that tend to hire and fire quickly, especially on contract.  Irregular income presents its own challenges for budgeting, planning and investing for long-term goals.  However, there are some steps that can help moderate some of the swings on your budget.

–Have a realistic estimate of income over a longish period, like 6 to 12 months — Similarly, have an estimate of a bare bones budget for each month.  In order to do this accurately, it helps to have good records of past income and expenses as well as a sense of how good your income estimates are.

–When you receive a large non-recurring payment — place that into a savings account rather than the account you use for bills.  Each month, transfer a designated amount to cover essentials.  Re-evaluate your income and expense forecast and if income looks strong, look to split the remainder between the account for bills and for investing.

--Recalculate taxes quarterly — if you pay self-employment tax, you will know that this can add up to a fairly substantial amount, and is due in quarterly increments.  Recalculating this as the irregular income becomes obvious is helpful.  Fortunately, for 2011, the social security tax rate is 2% lower than last year.

–If you are receiving income from several clients, be sure to take into account delays or non-receivables in your income projections. –also, these tips obviously work best when you start with a buffer, so if you are shifting to freelancing from regular employment or switching to a more commission based job, creating a buffer is a good step before the switch happens.

–When your essentials are covered, have a ranking of long-term investment goals, such as a new vehicle or building a retirement account — incrementally fill these with the amount leftover so that you fill your top goal first.

I’d love to hear of other strategies of coping with irregular income.

shared at this week’s Carnival of Personal Finance