Half of Americans no longer receive a steady paycheck, thanks in part to the rise of ride sharing and other gig economy opportunities. But most of our financial tools were designed for people with a regular, predictable income. Fast Company talked with Alexa von Tobel, founder and CEO of personal finance website LearnVest.com, for advice on how Americans dependent on freelance projects, gigs, and similar forms of work should manage their money.
Fast Company: What’s the most important financial habit for someone working in the gig economy?
Alexa von Tobel: One of the things that we tell people who have irregular incomes—that could be a sales job where your bonus varies wildly, or that could mean Uber and TaskRabbit—is that if you have any history of your income earning power, project that across the year and be conservative. Then, we recommend that you put your money automatically into a bank account and retrofit a standard paycheck to yourself [using your projected income as a guide]. One of the psychological things that happens when you’re in the gig economy is that people use irregular income as the reason why they’re not accomplishing their financial goals. You can avoid that trap by reverse engineering a paycheck and budgeting off that. That is one of the most powerful ways to gain control over your wallet in the gig economy.
FC: What should someone do before embarking on a gig opportunity?
AVT: Before you take on any big decision in your life, you need a financial plan. You always need one. That said, particularly before you embark on anything that has less predictability—being an entrepreneur, being a gig worker—you need to understand that there are pros and cons to that. The bare minimum, you need to do what I call the monopoly test and pass basic financial security. First, you have to have no credit card debt. If God forbid something goes really wrong, it will grow very quickly. Second, you need to be contributing to retirement and have some way of making sure your retirement does not go to zero. And third, and most important, you have to have an emergency savings account. We don’t want you to be leaning on credit cards to finance your life.
FC: How much money should be in your emergency account?
AVT: If you’re single and employed, what we would say is that you really want to have about six months. That six months is defined by what your bare, basic minimum life costs you. It’s your rent, it’s your electric, it’s your cell phone, your student debt. If you’re high earning, making over $100,000, you need nine months. The reason is, if you lost your $100,000 job, it’s harder to find a replacement on the same trajectory than if you’re on a lower trajectory. Finally, if you’re married with kids, my preference is minimum nine months. But I really want you to have a year’s worth of emergency savings. Life happens. I do not want your first stress to be—I do not want to go bankrupt.
FC: Should gig workers think about their budget in a different way?
AVT: My favorite tip is the 50-20-30 rule. Here’s how it works: 50% or less of your spending should be on your critical essentials. Roof over your head, groceries, utility bills, transportation to and from work, and any health expenses that you have to pay. That helps you right-size how much your rent can be. Next, 20% goes toward the future—saving for retirement, saving for kids. Finally, 30% or less is your lifestyle. That’s going out, Zara, exercise, travel. That’s a really good litmus test. If I see your budget and I see your rent is 60% of what you make, it’s the clearest sign possible that you’re not going to be financially fit.
FC: And gig workers should follow the same rule?
AVT: I’d prefer if your savings bucket was 25% or more. That said, even getting people to 20% is really hard.
FC: Sometimes gig workers and freelancers are surprised by the size of their tax bill. What should they do to prepare?
AVT: Always think about your taxes proactively. Take out the max, depending on your zip code, and put it in a different account. That’s where we find people get flat-footed. It’s just making sure you’re thinking that through.
FC: Some people use gig work to complement their regular income. Do you see that as a positive development?
AVT: Absolutely. I like to call it your “jobby,” your hobby job. What we’re seeing with millennials is a growing jobby economy, whether it’s teaching makeup or guitar lessons. You have teams of millennials who are augmenting their full-time job. The No. 1 thing millennials want is to save for is a vacation. The No. 2 thing is to pay off their student loans faster.
Note: This interview has been condensed and edited for clarity.