How to Save When You Are Self-Employed or Freelance with an Irregular Income
For freelancers and self-employed individuals, the freedom and flexibility gained from working for yourself often come with an unpredictable income stream.
So how do you save for retirement or other long-term goals with an irregular income? Here is a four-step process to set up your financial life so you can save as if you’re getting a regular paycheck, while still being the boss.
*Please note the following guide is geared toward sole proprietors and those reporting income on a Schedule C. This does not readily apply to businesses structured as Corporations, Partnerships, or LLCs that have made an S-Corp election.As always, it’s a good idea to consult with your relevant legal, tax, or financial professional.
Case Study: Let’s use Jane as an example. Jane is a 36-year-old self-employed graphic designer. She started her business a few years ago and is finally making more than her previous salary. She has multiple clients who pay her in different ways—some on a monthly retainer and some as a lump sum per project. She has been reading about the FIRE movement and now wants to start saving more intentionally for the long term.
Step 1: Get to Know Your Personal Spending
The first step to managing an inconsistent income is to gain a clear understanding of your starting point. There are many ways to do this, but this is one approach:
First, figure out how much your life costs per month. This may be the hardest part of the process, but stay with me! It can be easiest to use tracking software like Monarch Money, YNAB, or other budgeting apps. If you like to use your own methods or spreadsheets, that works too! It’s not about getting it perfect or ensuring all the categories are exact, but rather trying to get a pretty good sense of your average monthly spending. For now, do not include any monthly savings. Do you have a number you think is in the ballpark? Excellent, this is now your total monthly spending.
Next, separate your transactions into two categories: essential and non-essential. This is open to a bit of interpretation, but generally, essential spending includes the things you have to pay each month to live (rent, groceries, insurance, utilities, health/medical costs, La Croix etc.). It’s okay if the essential number isn’t that much lower than your baseline monthly spending, but hopefully, you’ve identified a few areas in your baseline that you could cut if you had to. This is now called your essential monthly spending.
Case Study: Jane’s total monthly spending = $6,000/month and Jane’s essential monthly spending = $5,450/month (she figures she could cancel her monthly massage, cut back on dining out, and reduce how much she puts toward travel each month).
Step 2: Figure Out Your Goals & Savings Targets
This is going to look different for everyone, but take some time to map out your short, medium, and long-term goals. Don’t forget to consider the "future you" who may want (or need) to stop working one day. What do you need to be saving monthly to reach those goals?
When you are early in your career, it’s okay to rely on rules of thumb to help you figure out how much to save. For example, trying to save 15-20% of your pre-tax income is a healthy benchmark. Depending on your goals, there are multiple accounts you can save into, like a SEP IRA, Solo 401(k), or a Roth IRA (though be sure to be mindful of income and contribution limits). Or perhaps your goals are to fund a trip or have a more flexible pot of money invested in a brokerage account. If you are not sure where or how to save as a self-employed person, I’d be happy to help—reach out and let’s chat.
Once you’ve landed on your monthly savings goal, add that to your total monthly spending.
Case Study: After discussing this with her financial planner and accountant, Jane would like to save $583/month into her Roth IRA and $500/month into her SEP IRA. Her total monthly saving goal = $1,083. Therefore, Jane’s monthly savings goal ($1,083) + total monthly spending ($6,000) = $7,083.
Step 3: Determine What Your Cash Cushion Looks Like
Having a healthy amount of cash is non-negotiable when your income is variable. While this isn’t a flashy money hack, I’ve never met a freelancer who regretted having a little extra cash when a big job falls through. It acts as a buffer during low-income periods and prevents you from dipping into investments or having to ask someone for help when unexpected costs arise (no judgment if you’ve had to do that—I’ve been there too).
The actual number is different for everyone. Here’s how to think about yours. A rule of thumb for self-employed people is 6-12 months of expenses. Some prefer more and some prefer less. Some people use their essential monthly spending, and some use their total monthly spending. It completely depends on your individual circumstances, industry, revenue, and lifestyle. The more fluctuation you experience, the more cushion you will want to be able to ride out the low-income months.
Haven’t Reached Your Emergency Fund Goal Yet? That’s okay! Start where you are and aim to save at least three to six months' worth of your essential monthly spending. If that seems daunting, start with a smaller, more achievable goal, like saving your first $1,000. The key is to make consistent contributions, no matter how small.
Separate your Emergency Fund: Once you’ve landed on a number you’re comfortable with, keep one (or two) month(s) in your primary checking account and then separate the rest into a high-yield savings account. This prevents you from dipping into it for non-emergencies while ensuring the funds are readily available when needed. Practically, some people like to separate this cash and keep half in their “emergency fund” and half in their business savings or personal checking (although it likely isn’t earning much interest there). The thinking is that income inconsistency isn’t an emergency—it's part of being in business, and having a cushion in your accounts feels better than drawing from the emergency fund.
Case Study: In Jane’s case, she has an emergency fund with $30,000, which is roughly six months of her essential monthly spending ($5,450). She feels comfortable with this number because she also keeps ~$20,000 in her business checking account. She feels confident that if push came to shove, she could get another job in under six months, even if it wasn’t her dream job.
Step 4: Pay Yourself!
With your emergency fund and saving goals set, the next step in reducing financial stress is to create a more predictable personal income stream, even when your business income fluctuates. If you don’t already have separate business bank accounts and credit cards, I recommend you set those up first and ensure all your business income goes into the business checking account.
But how much do you pay yourself?
Figure out your average monthly net income after business expenses and taxes. Make sure to look at at least a year of income so that you’re getting a more realistic average. This is now going to be called your “Faux Paycheck.”
Next, ask yourself if that number is higher or lower than your total monthly spending plus savings.
If it's higher, great! You have more room to save. I still recommend giving every dollar a job, even if it goes into a “TBD Fund.” This makes it harder to spend money unintentionally.
If it's lower, this likely indicates that you are spending more than you are making or that you aren’t able to reach your monthly savings goals. This could also mean that you are pulling from savings. Perhaps that’s on purpose if you’re just starting out, but your next goal is to get that number into the black. It can be hard to save during times like that, but don’t be too hard on yourself. Everyone has to start somewhere. Try something small, like $20/month, and focus first on building up your emergency fund.
Set up auto-transfers of your “Faux Paycheck” into your personal checking account each month. This number serves as your "salary" to cover your total monthly spending and your regular monthly savings.
Case Study: Jane’s average monthly net income after business expenses & taxes is ~$7,500, or $90,000/year. That is higher than her monthly spending + savings number ($7,083), so she has more room to save—$417 to be exact. Jane sets up an auto-transfer of $7,500 from her business account to her personal checking account and then sets up the following transfers to automate her savings:
$500 to her SEP IRA
$583 to her Roth IRA
$400 to her Brokerage Account
Stuck on a step or still need help? Please schedule a free call here, and I’ll be happy to help!
