As companies continue to cut costs by issuing layoffs and eliminating benefits, workers are turning to what’s referred to as the “gig economy.” According to Whatis.com, the gig economy is “a free market system in which temporary positions are common and organizations contract with independent workers for short-term engagements.”
The gig economy allows workers to be their own boss while accepting or declining different job offers. It provides tremendous flexibility and creativity but can present some money management issues if a budget is not utilized. Continue reading to discover 4 simple tips that can help you survive the ebb and flow of the gig economy.
Whether you’re new to the gig economy or you’re an experienced entrepreneur, dividing your income into percentage “buckets” can greatly enhance your money management. A well-known and proven method is the 50/30/20 percentage rule in which each number represents a percentage of what your income should go towards.
The first 50% should be used for your basic needs “bucket” such as food, gas, bills, insurance, and housing. The second 30% is what you’ll use for the things you want, whether its leisure activities or clothing. The remaining 20% should be used for paying off debt or increasing your savings account.
A common practice that many fall victim to is budgeting their income and only saving what remains. Basically, you take care of your mandatory bills, enjoy a pleasantry or two, and then save what you have leftover at the end of the month. More than likely, your savings will grow at a very slow rate.
Instead, determine what you want to save first, and then work your budget out from what you have remaining. Basically, work in reverse. Not only does this eliminate unnecessary spending, but it also allows you to adjust your income if you have a slow month.
It’s important that you give yourself a salary including benefits. A salary can serve as a marker in regard to how much you need to make each month. Operating a budget based on how much you make during a particular month can lead to overspending. It enables you to make poor financial decisions.
Rather, give yourself the same amount each month regardless of how much revenue you earned. It’s very easy to exceed your 30% entertainment bucket when you have a good month. Instead, use the extra profit to save or invest for the future by increasing the final 20%.
Typically, when you’re employed by a business you’ll fill out a W-4 to determine how much of your income goes to federal and state taxes. Since you’re a freelance contract worker, you’ll be responsible for paying your own dues. It’s important that you keep track of what you’ll owe when tax season comes around.
A good rule of thumb is to set aside 25% of your income into a high-interest account so you can earn a little extra cash as you wait to write the government a check. More than likely you’ll find that you’ve saved more than you owe in taxes. Take the surplus to pay off debt quicker or invest it into your retirement.