Over the past few years, many people have made the transition from normal 9-5 jobs to working in the gig economy. Many of the Gen Z’s out there may have never worked a “normal” job at all!
So, instead of being employed by one company for a fixed role, gig economy workers provide services to multiple businesses at once. Given Covid has made working from home so much more prevalent - this has made it even easier for those wanting more flexibility to be in control of their own time. This, along with the acceleration of the sharing economy (think Uber, AirBnB etc) has made it much easier for people to supplement or replace their normal employment.
As mentioned above, the increased flexibility is great as you can then decide what you do or do not want to take on. Goodbye to toxic workplaces and colleagues lol, if you don’t like a potential client then there’s no need to force yourself to work for them. But there must be a catch right? Well, yes. With flexibility comes potential uncertainty. If your assignments or contracts are typically quite short in duration, you may need to do many of them in order to make ends meet. This also means you need to have a large pipeline of future work. If your contracts are long-term, this makes planning easier, but it could make taking on new work trickier.
As long as you are doing work that you are adequately compensated for then everything should be fine in theory. But if you have a dead period where there is no work or if a client takes a long time to pay you for your work, you could run into trouble and wonder why you left that cushy corporate job in the first place! So you need to plan for these scenarios - this is one of the areas where you need to be a lot more responsible regarding your money and how you spend it relative to a normal corporate employee. Besides the lumpy income, you also don’t have the benefit of your employer setting up medical aid or retirement investments on your behalf - this is now your responsibility. You also need to keep putting money aside every month for your tax liability.
The best place to start is by drawing up a simple budget - Elizabeth Warren’s 50/30/20 rule is a good rule of thumb to follow (50% for needs, 30% for wants and 20% for debt repayment/saving). However, this is much trickier to implement if your income is different from month to month. One way to solve this is to pay yourself a salary every month. So build what you can call a salary fund where you put in all the money you earn from your gig economy work. Then every month draw a salary from that fund - it will be your responsibility also to ensure you are pulling out a sustainable amount every month otherwise you are just cheating your future self. If you’re looking for a budgeting app to help make these calculations easier, then check out 22seven. If you already have 22seven, then add your Franc account to see how much you are contributing towards your investments in total.
When you pull out money from the salary fund (say this is R20,000 a month) you also need to ensure you are budgeting for tax. The 50/30/20 rule was meant to apply to post-tax income so you would need to estimate how much tax you need to deduct every month - let’s say that tax is R2,000 a month - the 50/30/20 would need to apply to R20,000 less R2,000 - so R18,000. So your budget would be R9,000 for needs, R5,400 for wants and R3,600 for repaying debt and savings. Also, don't forget you need to also pay for medical insurance and put something away for retirement from your net salary above. Be very cautious when it comes to taking on unnecessary debt - you don’t want to overburden yourself knowing you owe money.
Whilst building this salary fund (maybe 3-6 months worth of “salaries”) you can simultaneously build up an emergency fund which has another 3-6 months of living expenses. The emergency fund, although potentially similar in amount will be for other types of emergencies - car repairs, burst geyser etc. Although if your salary fund gets depleted, you may need to eventually draw from the emergency fund in order to pay expenses. Once you have a fully funded salary fund and emergency fund then you can start making longer-term discretionary investments in products like equity ETFs and Tax-Free Savings Accounts to start building real wealth so that you will be ready for anything life throws your way!