Working in the creative industries can be incredibly rewarding. The freedom to pursue your passions, the thrill of seeing your ideas come to life, and the opportunity to work on varied and exciting projects are all part of the appeal. But let’s be honest – the unpredictable nature of income can be a real headache. One month, you might be flush with cash; the next, you’re wondering how you’ll cover your bills. This inconsistency is part and parcel of the creative world, but that doesn’t mean it has to derail your finances.
At Diamond Accounts, we specialise in accounting for creative industries, so we understand your unique challenges. We’re here to help you manage your fluctuating income effectively, ensuring you can confidently enjoy the highs and weather the lows.
Budgeting for the unpredictable
The first step in handling fluctuating income is to create a budget that can flex with your earnings. Traditional budgeting, where you allocate a set amount to each monthly expense, doesn’t work well when your income varies. Instead, we suggest a different approach.
- Prioritise your essentials: Identify your non-negotiable expenses – rent or mortgage, utilities, groceries, and any debt repayments. These are the bills you must cover each month, no matter what.
- Build a buffer: During the months when your income is higher, put aside some of the extra cash into a savings account. This buffer will be your safety net during leaner months. Aim to save enough to cover at least three months’ worth of essential expenses.
- Plan for irregular costs: Consider expenses that don’t occur every month—things like car insurance, holidays, or Christmas gifts. Estimate how much you’ll need for these and set aside a bit each month.
Using income averaging
Income averaging can be useful for smoothing out the ups and downs. This involves taking your total income over a period (say, the last 12 months) and dividing it by 12 to get an average monthly figure. This can give you a better idea of what you can afford each month.
When you receive more than your average income, treat the excess as savings. If you earn less, dip into your savings to cover the shortfall. This method helps prevent the feast-or-famine cycle that many creatives experience.
Tax planning for creatives
Tax can be a real minefield when your income isn’t steady. It’s easy to underpay when times are good, only to be hit with a hefty tax bill later. That’s why tax planning is so important.
- Set aside money for tax: HMRC will want its share, no matter what. We recommend setting aside around 25-30% of your income for tax purposes. This might seem like a lot, but it’s better to be safe than sorry.
- Consider payments on account: If you’re self-employed, you’ll likely have to make payments on account towards your next year’s tax bill. These are usually due in January and July. If your income has dropped significantly, you might be able to reduce these payments – talk to us if you’re unsure.
- Keep accurate records: Track your income and expenses carefully. This helps with budgeting and ensures you claim all the tax deductions you’re entitled to. Tools like accounting software can make this task much easier.
Diversifying your income streams
One way to manage fluctuating income is to diversify your sources of revenue. Relying on a single client or project can be risky – if it dries up, so does your income.
Think about ways to add new revenue streams. This might involve taking on a mix of short-term and long-term projects, selling products or services online, or even teaching your craft. The goal is to create a more stable overall income using multiple sources.
Don’t forget about pensions
When you’re focused on covering immediate expenses, it’s easy to put off thinking about your future. But saving for retirement is just as important when you’re self-employed or working in a creative field.
Consider setting up a personal pension plan and contributing regularly, even if it’s a small amount. The government offers tax relief on pension contributions, which means for every £80 you contribute, HMRC adds £20 – a nice little boost to your savings.
When to seek professional advice
There’s no shame in admitting that managing fluctuating income can be tricky. If you’re struggling to make ends meet or simply want to get a better handle on your finances, it might be time to talk to a professional.
We’re experts in accounting for creative industries and can offer tailored advice that suits your unique situation. Whether you need help with budgeting, tax planning, or setting up a pension, we’re here to help.
The bottom line
Fluctuating income is a fact of life in the creative industries, but it doesn’t have to cause financial stress. With careful planning, a solid budget, and the right advice, you can effectively manage the ups and downs. At Diamond Accounts, we’re committed to helping you achieve financial stability, so you can focus on what you do best – creating.
Get in touch to see how Diamond Accounts can help you handle fluctuating income in the creative industries.