Self Employed? How to Budget With Fluctuating Income

Strategies On How to Budget With Fluctuating Income for Self Employed Individuals | Guest Author: Beth Ann Bone


The bi-weekly paycheque is a foundation of financial stability. While this fact is often lost on those with steady, full-time jobs, some people willingly forego this security by embracing self-employment. They do this for various reasons, including balancing life with family or to slow down and transition into retirement. However, this is not true for everyone. Many are forced to get by with unpredictable income as freelancers, consultants or contract workers in the gig economy out of necessity because few other options exist. This can expose individuals and households to serious financial risk. 

In 2017, TD Bank commissioned the first study in Canada on income volatility. It revealed that almost 40% of adults, ten million Canadians, reported receiving fluctuating income. This included individuals getting paid inconsistently and with varying amounts each month. Of those, a third reported income shifts of more than 25% each month. These are staggering numbers! When your income is unpredictable, you are most likely to ignore credit card bills and rely on payday loans to get by. 

If you find yourself in this situation, then you must address the matter head-on to avoid long-term, spiralling debt problems. Here are some strategies on how to budget with fluctuating income, particularly if you don’t expect these fluctuation patterns to change soon.

Self Employed? Pay Yourself

Everybody has living expenses which may include both fixed expenses, like mortgage, rent and car payments as well as debts, like student loans and credit card bills. Financial stress results when these payments become due on a cycle that is out of sync with your income flow. In this situation, you should force regulation between your debts and income through self-discipline. Pay yourself on a monthly or bi-weekly basis. Before you do this, however, you must first understand how to budget for long-term financial success. 

Many individuals find it worthwhile to engage a professional for this exercise, someone with financial experience who can help bring a balanced perspective to your finances. Credit counsellors specialize in coaching individuals on debt management, but you do not have to be in financial trouble to seek out their services. 

Documenting Expenses & Income

At the minimum, you should pay yourself enough to cover your basic living expenses. These include mortgage or rent, food, transportation costs, utilities and property taxes and of course debt repayment. Outlining these on a spreadsheet will help you visualize whether you have an income deficit to start out with.

If this is the case, then a coach can help you with strategies to supplement your income. It is not unusual at all to have multiple income sources today. Technology-based giants, like Uber and AirBnB, allow individuals to participate in the sharing economy and earn money with flexibility. In fact, diversifying income sources is an important strategy to mitigate fluctuating income for anyone who does not have full time or permanent employment.

With your income and basic expenses documented, switch focus to your discretionary spending. This covers items that you could cut, if necessary, like eating out, subscriptions, vacations, etc. Resolve to enjoy these as perks when your fluctuating income permits it. However, before you spend this money, keep long-term financial planning in mind as outlined below.

Emergency Fund & Long-Term Savings

Financial advisors recommend putting money aside for an emergency fund that covers 3 months of living expenses. For peace of mind, self employed individuals should plan on a thicker cushion of at least 6 months. This is because, unlike employees, you do not receive paid sick days. You require an extra safety net to help you through emergencies that might render you unable to work. Group disability plans, readily available to employers, could fill this void. However, insurers make them cost prohibitive for freelancers due to a history of high and fraudulent claims.  

Draw from your emergency fund when your earnings are low. This will allow you to keep up with your expenses. But remember to top it up when your income increases. And in a similar vein, when the emergency fund is taken care of, consider setting aside surplus money for other long term goals, such as saving for a mortgage, planning for retirement or your children’s education.

Multiple Bank Accounts

The government offers many benefits to self employed individuals, including the ability to write-off legitimate business expenses against your income to reduce any income tax payable. Always consult an accountant to receive accurate advice about your situation. You must retain proof, such as receipts, in the event of a CRA audit.

The best way to execute this is by keeping multiple bank accounts. Deposit the income from your clients into an account dedicated for business. You can pay expenses related to your business, including your own remuneration, from this account. Your living expenses and personal discretionary spending should all come out of your personal account. In fact, you should use separate credit cards to define your business expenses from personal.

Budgeting: Don’t Forget Taxes

Those new to self employment, especially individuals making the transition from employee status, often overlook budgeting for taxes. Paying taxes is a requirement and there is no way around this obligation.

An accountant can advise you of the tax rate payable based on your individual situation. However, a good rule of thumb is to set aside 20% – 25% of your earnings for income tax purposes. This can be done by either transferring these amounts directly to CRA when you pay your own remuneration or holding them in yet another bank account for remitting when they are due.

If you also charge your clients HST, you are collecting these funds in trust to remit to the CRA. You can claim the applicable input tax credits against these funds. However, they should not be treated as a source of income. Many self employed individuals are surprised at the significant amount of funds they must set aside from their gross receipts for tax purposes!

Cover Your Costs

This is where the power of your financial planning is most useful. If you document your carrying costs and budget for them properly, then the hourly rate for your freelance services should cover your true cost of doing business.

Many new to this game often start out undervaluing their services by setting their rate the same as an hourly waged employee. They overlook costs that employees normally do not carry. For example, employers pay for internet, equipment, office supplies; they manage the bookkeeping and tax remittance functions, etc.

It is quite normal for a business to re-hire ex-employees as higher paid consultants for doing the same job. When employees pivot into consulting roles, they bear many costs which were previously paid by the employer. Not glossing over this significant point will permit you to move ahead through self-employment, profitably

How to Budget: Think Like a Business

The most valuable change you can make, if you have a fluctuating income, is to think of your finances like a business. All good businesses operate with an annual budget that ensures payroll expenses and obligations to their suppliers are covered and paid out on a predictable cycle. Nothing could be worse for a business than to lose valuable employees because of payroll problems or to lose suppliers due to non-payment. You should operate on the same principle. Ensure your budget allows you to cover your payroll regularly, each month and that this payroll sufficiently covers your cost of living expenses.

Healthy businesses also operate on diversification of revenue to reduce exposure to risk. They ensure no single client or customer makes up more than 60% of their income. They constantly engage in sales and marketing actions to ensure growth of revenues and income sources. Self employed individuals will also find sound advice in this strategy.

All businesses go through lean cycles. Resilient organizations plan for contingency financing through long term investments or low interest lines of credit. This ensures they make payroll during slower months. Your emergency fund should fill this role.

Once these basic structural elements are in place, a business can move forward comfortably into their growth phase. Surplus revenue is then either reinvested into the business or shared with employees as bonuses. As a self employed individual, you can deploy the same by investing in RRSP’s, saving for a downpayment or rewarding yourself with a well deserved vacation.


Beth Ann Bone, Beth Ann Bonea Senior Financial Administrator and Insolvency Counsellor, is guest author for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.

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