Work out the bare minimum you can live on
First off, you need to know your ‘baseline’ – the bare minimum you can live on. This will help you cover your basic needs and manage any extra money after that.
Create a list of your essential expenses, like:
Rent or mortgage payments
Household bills
Minimum payments on credit accounts
Basic groceries
Travelling to work
Work out how much you spend on these in a month. You can do this by looking at your recent bills or bank statements. Or if you use Monzo, check the Summary tab in your app. The cost of things like energy bills can change, so it’s best to slightly overestimate them.
Finally, add everything up. This is your baseline figure – the smallest amount you can live on each month.
Set money aside for emergencies
It’s always good to have an emergency fund for essential but unexpected expenses, like your car breaking down. And it’s even more important if you can’t always predict when and how much you’ll get paid.
So once you’ve covered your basic needs, set aside some money every month. You could move money into another bank account or a savings account. Or if you use Monzo, you can add money to a Pot automatically to keep it separate from your main account.
Try to only dip into your emergency fund when you need to make one-off payments for things you can’t do without. And make sure to build the fund back up if you do!
Get a month ahead
You should aim to start each calendar month with at least your baseline amount in your account. This is true even if you’re usually paid more than once a month, because you’ll still have to pay for lots of things on a monthly basis – you need enough in the bank to make big payments (like rent) in one go.
Being a month ahead also gives you a buffer if your employer pays you late. And although you shouldn’t have to chase up invoices, it gives you a little extra security if you don’t get paid when you should.
To get a month ahead, you may need to live on a bare-bones budget for a while. Try piggy banking and locking money in Pots to control your spending.
If you're self-employed, another option may be to charge your client before you do work for them, rather than after. Even getting half the fee upfront can help.
Use your extra money wisely
Once you’re in a pattern of living on last month’s income, try creating a zero-sum budget. This involves giving every pound you earn a purpose, so you can use your money more efficiently. You can keep adjusting a zero-sum budget to account for changes in income and expenses. Don’t forget to budget for annual expenses too, like an MOT for your car.
Build a buffer in case work dries up
Work can dry up with little or no warning when you’re freelancing or on a zero-hours contract. But you can ride out these slumps by saving money when you’re feeling flush. Try to put away at least three months’ worth of your baseline amount.
If you’re self-employed, it’s also worth looking into income protection insurance. This can help you cover expenses when you’re not earning because you’re ill or injured.
Predict how much money you’ll have
Something called a ‘cash flow forecast’ lets you match how much you expect to earn against how much you expect to spend – including when the money should reach or leave your account.
This will help you budget over the long-term. It can also help you make sensible decisions about how and when you work. For example, you might avoid going on holiday the month after your income’s due to dip.
You can create a simple cash flow forecast using information about your previous earnings, your annual budget, market knowledge (like seasonal trends), and contracts with your clients or employer. It’s worth having a look for apps to help you do this, such as CashFlow Free.
Prepare to pay your tax bill
You have to tell HMRC about any income that hasn’t been automatically taxed – this often includes freelance fees and cash tips. You can do this by filling in a self assessment tax return. Then you must send HMRC any income tax or national insurance contributions that you owe.
There are penalties for paying your tax late, so it’s important to have enough money set aside for HMRC’s deadline (usually the end of January).
Use your cash flow forecast to estimate how much tax you’ll need to pay. Make sure to adjust this if you start earning more than you expected. It’s often worth overestimating the amount anyway.
Try to tax yourself every month and put the money aside in a savings account or Monzo Pot. You can lock the Pot until the date you need to pay tax.
To keep track of your spending, stick to your budgets (even if you don't get paid regularly) download Monzo today.