Plan Ahead: Tips to Prepare for Unstable Income and Financial Volatility

The job market is changing at a rapid pace as more individuals are leaning away from traditional jobs towards independent gig work. While becoming a gig worker will give you great perks like flexible hours and independence, it can come with unstable income and financial volatility. As a gig worker, you will need to be prepared financially during off-seasons or when there isn’t enough work available.

You may be wondering, what is income volatility? Or what is irregular income? Income volatility is about change and unpredictability when it comes to how much money you are making. The higher the volatility, the more uncertainty there is. Having an unstable income can be difficult when you are trying to reach your financial goals. This is becoming more common as gig work is an important part of today’s labor market.

As outlined in our Ultimate Guide to Working in the Gig Economy, the world of work is changing and the gig economy has been on the rise. Approximately one in six workers is self-employed, with many working for gig platforms as a driver or food courier. The main difference between a gig worker and a traditional salaried worker is the fluctuation of income. Traditional 9-5 workers can expect relatively the same salary at each payday, however gig workers can see spikes and dips in their income over time.

Income instability is prevalent for gig workers because most, if not all of the work is based on demand. If demand is low, then there is less work for gig workers. This tends to happen a lot during slower seasons or when unexpected events happen. The beginning of the year tends to be slower for rideshare drivers after the holiday parties are done and consumers ease down on their spending.

On the other end, a more sudden and drastic example includes the effects of the pandemic where most workplaces suddenly had to close their offices. This meant significantly fewer people needed to leave the house, bringing the demand for rideshare drivers down within a matter of days. Having income instability makes it difficult to tackle extreme events like this.

To get a better understanding of the negative effects of financial volatility, we can look at the following income volatility statistic here:

“Swings in monthly income, whether due to gig work or not, have been linked to a range of negative financial effects, including lower overall savings and a higher rate of missed bill and mortgage payments”.

Irregular income planning as a gig worker is important for working towards both short and long-term financial goals. When you have control over your income changes, you will be better prepared during slower months, unexpected events, and for a post-COVID future. Here are seven tips to help you manage unstable income and financial volatility as a gig worker.

 

Cut variable expenses

Since gig work has more variation in income month to month, it’s important to cut variable expenses when possible. Fixed expenses are costs that stay the same period to period, such as rent. Whereas variable expenses are costs that change and are often not necessary. This can include eating at restaurants, buying clothes, or going to the movies.

You should try to keep your expenses low if financial security is a concern to you, especially because your income can vary from month to month. You need to prepare for periods of time where projects may not be available and your income may be inconsistent. With the extra money, you can put it aside for your savings or emergency funds.

 

Keep an emergency fund

Those with children will often ask how can a family prepare for income volatility. Having an emergency fund is crucial to building a cushion for you and your family to fall back on. This is important because you’re not only looking out for yourself but for those you are caring for.

We recommend saving enough money to cover living expenses for at least 5-8 months. Unprecedented situations may arise that need extra cash on hand, like medical costs or months that have a lower income stream. To prepare for this, we recommend putting aside 10% of your paycheck from high-income months if you can towards a savings account.

Your emergency fund should be in an easily accessible account. It should be in either your checking or short-term savings account depending on how much you have put aside. You want to be able to withdraw the money anytime without any penalties because life events and expenses can happen unexpectedly.

 

Save for your future 

It’s never too late to start saving money and properly manage your finances. Being financially responsible is important not only for you now, but allows you to have greater opportunities to build your wealth in the long term. If you don’t already have a savings account, you should start building one. You can start small and slowly add to it each month. During months you have more income coming in, you can contribute more to your savings.

Think of a few short and long term financial goals you can work towards. Having a goal in mind will give you the motivation to put money aside each month. You will need to think of the larger picture to keep you on track. This can be anything from saving for a transportation upgrade or purchasing a home. If you have young children, this could mean saving up for their post-secondary tuition.

 

Always keep your receipts

Many people fall into the habit of tossing their receipts as soon as they get home. This can make tracking your spending and expenses quite messy. Keeping all of your receipts until the end of the month and going through each one will give you a better idea of where your money is going. It will help you reevaluate your financial choices from month to month and how you can better build financial stability.

Keeping receipts on hand can also be helpful when it comes to tax season. Business costs such as gas and upgrades can potentially be expensed to reduce the amount of taxes you owe. It is best to do your research to see what can be expensed and keep the receipts for them.

 

Set aside money for taxes

As an independent contractor and gig worker, you are responsible for filing your own taxes. You should set aside at least 20% of your income for tax purposes. Keeping a record of your expenses, receipts, and income will make filing for taxes much easier.

 

Keep your end goal in mind

Your mentality matters when it comes to managing unstable income. Buying a new TV or saving up for a down payment are examples of larger purchases that require savings. Keeping these end goals in mind when you are planning your finances around an unstable income will help keep you on track. It encourages you to minimize impulsive purchases and finding ways to cut variable costs. Think of where you want to be in a few years and how you will get there.

 

Have a financial safety net

You don’t have to feel alone when unexpected expenses come up, like a flat tire or a dead battery on your delivery vehicle. Having some form of a financial safety net will help relieve financial stress during slow months when you’re not earning as much as you would like. This can be having family members to turn to or a line of credit you can use.

We recommend applying for affordable loans that will allow you to borrow money with lower interest fees and flexible repayment plans. It’s important to try staying away from payday loans because while you can easily get a hold on cash, the interest fees can make it incredibly expensive to pay off. They can trap you in a cycle of debt, especially if you have poor credit or no savings.

With all of these steps in mind, you can start building up your financial reputation as a gig worker. Once you start building your financial safety net with savings, an emergency fund, and an affordable line of credit you can rely on, you will feel confident each month regardless of the income fluctuation.

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