6 Budgeting Musts with a Gig Job

Posted on Feb. 8, 2022

IMAGE: Man in protective mask delivering groceries to woman in doorway.The gig economy has forever changed the way millions of Americans work and earn. According to Small Business Labs, 59 million Americans participated in the gig economy in 2021. That’s 36% of the U.S. workforce. While gig economy jobs can offer benefits like flexible hours and flexible pay, there’s a potential downside: Budgeting can be challenging if your income isn’t consistent from month to month.

Creating a budget with variable income means taking a slightly different approach to managing your money, compared to how you might budget with a fixed, regular income. If you rely on a gig job to pay the bills, read on for some budgeting tips.

1. Determine your income.

Determining your income and expenses is the foundation of any budget. However, it gets trickier when your income is irregular, especially when you are first starting. It’s best to take a conservative approach. If you’ve been working a gig job for several months and have some income history, base your income on your lowest monthly earnings. If you are just starting, base your income on your lowest monthly estimate. If this is your first gig job, it’s essential to begin tracking your actual income, comparing it to your original estimate, and making adjustments as needed. Over time, this will give you an accurate picture of your true monthly earnings.

2. Determine your expenses.

Next, you need to determine your expenses. Start with your essentials: food, shelter, transportation, and debt payments. Once your essentials are listed, start listing your non-essentials, like TV and entertainment. As a gig worker, you’ll have an additional essential expense for taxes (more on that topic in the next section). And you need to plan for savings and retirement (more on that later, too).

Don’t forget about expenses associated with your gig job. The cost of gig work varies from person to person. For example, if you freelance out of your home, you may have substantial expenses, such as a computer or internet service; if you work for a ride-share company, you’ll have car-related expenses; and if you rent out a room in your home, you’ll have additional utility expenses.

3. Save for taxes.

Most gig workers are considered independent contractors. Unlike regular employees, federal income tax, Social Security, and Medicare taxes are not deducted from your pay. But, of course, gig workers are still expected to file and pay taxes just as employees are: Gig-work income you earn is taxable income. If taxes aren’t withheld from your pay, you need to save and pay these taxes yourself. Saving for taxes must be included in the expenses you identified in step two above. If you fail to plan properly for these costs, your year-end tax obligation will likely feel like a massive expense.

If you earn money for gig work, you may need to pay quarterly estimated taxes. You can avoid a penalty if you pay enough estimated tax on time. Consult a tax professional or visit the IRS web page: Manage Taxes for Your Gig Job to learn more about managing your taxes.

As a gig worker with an adequately funded emergency savings account, unexpected income fluctuations won’t become a financial disaster.

4. Establish your emergency savings account.

Sound financial planning dictates having no less than three to six months of expenses covered if you cannot work or work is scarce, plus unexpected costs. As a gig worker with an adequately funded emergency savings account, unexpected income fluctuations won’t become a financial disaster.

To establish your emergency savings account, look at the expenses you identified in step two above. What amount did you set aside for savings? Make a commitment to save that amount every month, then set up an automated transfer to your emergency fund at regular intervals: per month, per week, or per payday. The key is to make savings a habit and set up a separate account specifically for your emergency fund.

5. Don’t forget about retirement.

Traditional jobs often provide a retirement plan for employees, but you most likely won’t have that benefit as a gig worker. However, that doesn’t mean you shouldn’t make saving for retirement a priority. We recommend saving 15 percent of your gross income for retirement. Much like your emergency fund, continue to contribute to your retirement every month and set up automated transfers.

Without access to a 401k, we recommend investing your retirement into a Roth IRA1. With a Roth IRA, you won’t pay taxes on the money you withdraw in retirement, and the money you invest in a Roth IRA grows tax-free. In 2022, you can invest $6,000 into an IRA if you are under age 50 and $7,000 if you are age 50 or older.

6. Match your budget to your income and make adjustments.

Now it’s time to ensure your income equals or exceeds your expenses. Try a zero-sum budget; by budgeting for your expenses, taxes, emergencies, and retirement, you can budget for every dollar so your balance is zero at the end of the month. If your budget doesn’t balance the first time, tweak your numbers. If you come up short, look at your entertainment budget and other non-essentials. Can you trim some expenses there? And consider, one of the benefits of a gig job is the flexibility to work more hours. If your expenses are more than your income, you could pick up more hours at your current gig or even pick up a second side-hustle.

Budgeting in the gig economy isn’t exactly a piece of cake, but it’s not impossible either. To make it work, it’s essential to understand your earnings and your expenses. Once you’ve got those numbers down, you can begin tweaking your budget, ensuring none of your bills — including what you need to cover work expenses, taxes, emergency savings, and retirement — slip through the cracks and begin enjoying the flexibility of a gig economy job.

If you wish to comment on this article or have an idea for a topic we should cover, we want to hear from you! Email us at editor@texell.org.

1This article is for educational purposes only. Texell does not offer investment or advisory services, nor does it offer tax advice.

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