Many skilled individuals are leaving formal employment to join the so-called Gig Economy. This is when organisations hire contract and independent workers for short-term contracts or “gigs”. This is particularly true in the technology, communication and media sectors, but the term can also apply to Uber drivers or even a bookkeeper who does the books for several smaller clients.
One of the traits of gig economy workers is that they have more than one gig going. Some may have a full-time job but run a gig on the side; others have a portfolio career approach, such as Money Makeover contestant Tamsin. She works as a continuity editor in the film industry, runs her own web design business and rents out a portion of her house on Airbnb.
The key to a diversified gig approach is that each of these brings in money during different times of the year, providing a sustainable income. The film industry in Cape Town, where Tamsin is based, has its peak times between October and February each year – but the winter months provide very little income. Her AirBnb rental is also predominately summer income but it falls over a shorter period, November to January. Last year was a tough time in the film industry because of the drought in Cape Town and Tamsin saw a drop in her income from the film business, but was fortunately saved by her web design income which she focuses on in winter.
Tamsin’s aim for Money Makeover was to organise her finances so that she could recreate a more sustainable income. Absa adviser Leighanne Decker set her the following goals:
Always pay yourself a salary
Tamsin was living from feast to famine, depending on her income. During good months she would spend and in bad months end up relying on her credit card to make ends meet.
Tamsin’s first action was to get her business and personal finances separated and to create a cash-flow model that allowed her to pay herself a regular monthly income.
Tamsin created a budget so that she understood how much it was actually costing her to live and what salary she needed to earn.
Tamsin now has a contingency “salary fund”. She has two months of expenses, but her aim is to have three months’ salary in the fund. This will allow her to smooth her income during “down” times. At the end of January Tamsin will be able to pay herself her first proper salary rather than drawing from the business. This will cover her living expenses, as long as she sticks to her budget.
Have an emergency fund
Tamsin is building up a personal emergency fund – to cover those unexpected bills that are over her budgeted living expenses. It needs to be separate from her “salary fund” because it is for unexpected expenses, not a shortfall in salary.
Manage your tax bill
While Tamsin’s income from her film work is taxed at source, it does not take into account the income she receives from her Airbnb and web design business.
Decker says that although Tamsin has been well organised with her taxes, one of the most common problems with self-employed clients with multiple streams of income is that at the end of the tax year they find that they are in a much higher tax bracket and land up with a tax bill they were unaware they would have to pay.
“This is prevalent in the market where people have retired, have a pension and they return to contract work and are now earning an additional income, plus they have interest-bearing investments.”
Decker recommends that, if you are self-employed or earning money from a side gig, you open a “tax savings” account which will ensure that the right amount of tax is put away and readily available when that tax bill comes in.
Understand your tax deductions
One of the benefits of being self-employed is that any expenses incurred in producing an income can be deducted for tax purposes. If you work from home you can deduct up to 20% of mortgage interest as “rental” or if you are earning a rental from a property you can deduct the full monthly interest portion.
Decker identified that Tamsin was not using her travel expenses. “By tracking her business-oriented mileage she can receive a tax deduction for travel expenses, including the interest she is paying on her car loan. She can get a healthy tax deduction, as long as she maintains a log book,” says Decker.
A retirement annuity is also a great tax deduction while putting money away for your retirement. Committing to a monthly contribution may be difficult with a variable income, so you can top-up before February 28 when you can calculate your tax rate and what additional funds you have available.
Analyse your work portfolio
Absa business consultant Elton Govender worked with Tamsin to understand which of her businesses were contributing the most to her income and which she may be spending too much time on compared with the relative income.
They calculated that the Airbnb was the most time-efficient as it generated 31% of her annual income for very little time commitment. The film work contributed the most at 42% of her total income. Although it is very time-demanding during peak season, given that Tamsin only works about five months of the year, it was fairly time-efficient. The least efficient use of her time is her web design business which generated 27% of her income but which requires a great deal of work and stress. However, the web design business is a vital source of income during the quieter winter months.
Govender recommended the following ways for Tamsin to boost her web design income while reducing her time commitment.
Market yourself: Her own business website needed to be redesigned and freshened up to attract new business. She needs to promote the business via social media and her established network for new business.
Outsource until you can in-source: Tamsin is not yet in a position where she can employ full-time staff so she needs to find other gig workers to whom she can outsource business. This will help grow her business without the additional fixed overhead costs. “As the business grows, she will then decide to bring the continual work in-house and outsource the not so routine jobs. This will create a stable income and the capacity to take on bigger one-off jobs,” says Govender.
Use your existing client base: Tamsin needs to look at her existing client base as a possible network, especially those that may have a wider network of other businesses. By having her details on all her clients’ websites, anyone who is impressed with her work will know how to contact her.