When you have a traditional job, you get paid pretty much the same amount every two weeks or so. When you work for yourself, your earnings can vary dramatically from month to month. That makes understanding your cash flow — and building up emergency savings — a must.

Surviving uneven cash flow

Every freelancer has a different explanation about why an emergency fund is pivotal to surviving self-employment. Of those I’ve interviewed: One had a medical issue that meant she was out of work for several months. Another had a scofflaw client. One was simply unprepared for the shock of paying income taxes in lump sums, rather than through employer withholding. Another lost a key client and had a lean stretch trying to replace the income. In every case, having an emergency fund — a financial cushion — was the key to making it through.

The only certainty is uncertainty

How much of a financial cushion do you need? That’s a tricky question to answer. Financial planners suggest anywhere from three months to a year’s worth of living expenses, depending on the circumstances of your life. If, for instance, you’re married to a supportive person, who has a day job that pays most of your bills, you might get away with a three-month cushion. But if that marriage — or your spouse’s income — is tenuous, you’d need more.

If you are young, single and able to couch surf, you can also get by with less. But, if you’re the main breadwinner, you’d need a cushion amounting to at least six months of your living expenses. Having young children adds to the uncertainty of how much you might need to spend in a given month. More uncertainty suggests more emergency savings.

To set a number, think of the various things that might go wrong in your life, from automobile break-downs to medical emergencies.

What could those challenges potentially cost you? (With a medical disaster, this would amount to your maximum out-of-pocket cost on your health insurance.) With an automobile breakdown, it could range from a few hundred dollars to the cost of replacing the vehicle.

How likely each problem? What other resources, such as insurance, could you tap to pay the bills during that time?

The rest of the money needs to come from emergency savings. Err on the side of caution, setting aside more than you think you’ll need. No one has ever complained about having too much money.

Realize too that cash flow challenges aren’t just sparked by emergencies when you work for yourself. Self-employment rarely provides anything close to regular income, which means you have to do a lot of planning to pay your regular bills on irregular wages.

Budget

So, in addition to having a healthy emergency fund, you need a budget if you want to make it as a freelancer. This budget will help you figure out what you spend each month, and which bills are necessar and which are discretionary. That can help you identify where to cut back, if you happen to have a lean month.

Budget basics

Pull out your bank and credit card statements and use it to put together a list of your regular expenses, from rent and insurance, to food, entertainment and travel.

Make sure to include the irregular expenses, such as property taxes and home and auto insurance. Anything you pay annually should be divided by 12, so you can figure a monthly amount into your budget.

Also budget for savings and vacations. After all, your need to take a break from work doesn’t just go away, when you leave the employer who offers vacation pay. And, where the cost of the trip is the biggest expense when you were working for someone else, your biggest expense as a freelancer is time. Every hour that you don’t work is an hour you don’t get paid.

When you have a monthly amount that you spend, you can better gauge how much you need in emergency savings. 

Ideally, the goal of all of this is to eliminate some of the financial stress that comes with working for yourself. Once you have a good handle on your personal cash flow — the money coming in and going out — you’ll be better prepared to survive self-employment without economic crisis.