How to Manage Inconsistent Income as a Freelancer
Landing a new freelance client is exhilarating, no matter how long you've been in the game. Less thrilling, however, is figuring out how to manage your money when paychecks come in at all times of the month and clients have their own invoicing schedules that in no way correspond to when your own bills are due. After 10 years of freelancing, I've created a system that works for me — but it does involve working ahead. Here's the method I use to manage my money, plus some bonus tips for dealing with clients that have inflexible accounting protocol.
4 Steps for Managing Inconsistent Freelance Income
Before I jump into my own process, know that there’s no right answer for managing your money. But it is helpful to create your own systems that work for you. Here’s what I do to give you one idea of how you can create a steady income stream as a freelancer.
Step 1: Invoice once a month. Each month I invoice the majority of my clients on the last day. Unless it's a large corporate client with their own process, they have 30 days to pay.
I use Harlow to send my freelance invoices (affiliate link)
Step 2: Receive payments. Over the course of the next month, I'll receive those funds into my business bank account. I rarely have issues tracking down payments with my clients because most are recurring projects that I’ve worked on for a long time. Investing your time to build out this type of clientele can remove a major headache from your cash flow.
Step 3: Run payroll. At the end of that month, I run payroll through Gusto and receive a set salary. This also diverts funds to state and federal taxes. I actually use a service called Collective to oversee my payroll.
Step 4: Take distributions. I can choose when to take out extra earnings with a distribution. My business operates as an LLC taxed as an S-corp, so I don't have to pay self-employment taxes on those distributions. (Collective also did most of the work in setting up this business formation).
Try out Collective with one free month (affiliate link)
With this schedule, each month of work I do actually pays me two months in the future. So at the end of April, I invoice for work I completed this month. I'll get paid throughout May and pay myself on the last day of May to use throughout the month of June. I didn't always operate this way. I used to take my finances week by week and day by day depending on who paid when. But that's a stressful way to live.
It definitely takes time and savings in order to get ahead enough to make my current strategy work. But it's the best way I've found to turn inconsistent income into a stable financial situation. As long as you're filling in your workload to earn that minimum threshold to cover your salary and taxes, this becomes a simple process that repeats each month.
(Side note: I share how I keep a consistent flow of work in my ebook, The Fully Booked Freelance Writer)
How to Deal with Longer Invoicing Terms
Issues can arise, however, if you have clients who pay invoices over a longer period of time. They're usually larger corporations that don't have any flexibility in their payments. Here's an example. I have a client whose work comes and goes in waves. The pay is great, but I might have a few projects one month, and then nothing for the next two months. On top of that, it takes the company 90 days to pay. Talk about stressful!
I get around that hurdle by not even counting those funds in my monthly earnings. Then I make a note of when I can expect that money and count it as a bonus. (Usually it goes towards our vacation savings!). I find it much easier to keep those outlier clients truly outside my expected cash flow.
Turn Your Irregular Income Into Steady Cash Flow
No matter how much you're earning as a freelancer, start identifying ways you can build consistency into your own finances each month. Incorporating and running payroll may not be the right step at this exact moment, but tuck away that process for when you're regularly earning a full-time salary. And in the meantime, you can still open up a business bank account as a sole proprietor. Then you can accumulate extra earnings and start taking out scheduled transfers into your personal account to use for your living expenses.
It's basically the precursor to paying yourself a salary. And you'll feel a lot better not worrying about when every client is going to pay in the days to come!