How to manage in the gig economy
Being self-employed has many benefits. You can freelance in your PJs, choose interesting contracts from a variety of employers and attend your kid’s school play without asking the boss for time off. Working in the gig economy is awesome, right? Not so fast. While many enjoy the flexibility of gig or on-demand work, there can be significant financial challenges to being disconnected from a corporate paycheque. There’s budgeting on a fluctuating income, saving for retirement without a group plan and setting aside money to pay taxes since it’s not deducted from your pay.
If you’re feeling this financial stress, you’re not alone. A 2018 study by staffing company Randstad Canada found 20 to 30 per cent of the Canadian workforce is comprised of “non-traditional workers.” By 2020,wthat number could grow to 45 per cent, according to Intuit Canada.
As work patterns shift and the contractor model continues to grow, it’s wise to get a handle on saving and spending in the gig lane so you can meet your short-term obligations and longer-term financial goals.
I’ve been a gigger for 10 years and have learned a few tips and budgeting tricks the way. The process may be simple, but you have to do the work.
Create a budget using your average net income: If you have one or more years of irregular pay, start by calculat- ing the average net (after tax) income you've earned each year, divide by12, and a use that number to build your monthly budget.
If you’re new to the gig grind with only a few months to tally, you must revisit your average regularly to account for both lean and lucrative times.
Next, calculate all your average monthly expenses, and compare this to your income. If the difference leaves you in the red, find ways to increase your earnings or cut expenses to make your budget balance. Budget using three bank accounts: You will need three linked accounts: two highinterest savings accounts and a chequing account.
The first savings account is your holding account. Deposit all your income from every source — don’t forget your tax refund, bonuses and tips — into this account and use it to pay yourself the monthly budgeted amount you calculated earlier. The key to making this system work is to hold a minimum of three to six months of expenses, so when you’re raking in the dough during good months, your holding account balance grows, and with leaner months, the balance decreases. Be sure to keep your monthly pay the same and not be tempted to draw extra funds when you’ve had a profitable month — this money needs to last for harder times, too.
Your second savings account is for setting aside funds owed to the government, such as income taxes, HST or GST and CPP contributions. Paying taxes shouldn’t be a big surprise when the deadline comes, so you must save as you earn. Find an online personal tax calculator to estimate your average tax rate, and move that money from every deposit directly to your tax account.
The third account is for paying your expenses. Move the monthly budgeted expenses from your holding account to your chequing account each month, and use the balance to pay for your housing, credit cards, food, transportation, debt repayment, and all other bills. Emergency savings and retirement: Don’t fall into the psychological trap of blaming your irregular income for not saving for the future. Build your budget to include a contribution to a TFSA and/or RRSP to ensure your retirement and future financial goals don’t go to zero.
Starting an emergency fund is also essential to gig-economy workers because falling ill or losing a contract happens, and depending on credit cards or lines of credit to finance your life can go negative fast.
Building a realistic budget and living life with flexible work and varied income can take a little patience and practice.
Always re-evaluate your progress and adjust to make it work for you.