Just imagine the condition of freelancers, salespeople, businessmen, and self-employed people. All of them have an irregular or fluctuating income. Still, they’re managing their budgets like a pro. Ever wondered how?
Self-employed people don’t have any idea of how much they will earn in a month or when they’ll get paid. They have a crazy work schedule and an uncertain future. They don’t know which month will be a complete disaster. Still, they are managing their budgets. It’s because they use these 4 kick-ass tips. If you have an unstable income, then you can use these tips as well.
Check out these 13 tips that you can use to stick to a budget with an irregular income.
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13 Tips on budgeting with irregular income:
1. Create a bare-bones budget based on your baseline
You know your baseline, i.e, the minimum amount you earn in a month. Just look at your lowest-paid month in the last year. Calculate how much you earned.
Create a bare-bones budget on the basis of your necessary expenses in a month. Necessary expenses include groceries, mortgage, utility bills, childcare, etc. Suppose your total necessary expenses amount to $450. This is the minimum amount you need to earn every month to cover your basic expenses.
Once you have listed the expenses, put the amount you’ll spend on each item inside different envelopes. For instance, put $100 for the cable bill, $300 for groceries, etc.
2. Look at your discretionary expenses
Remember, you have an irregular income. So you have to plan everything carefully. You have to create a list of discretionary expenses and rank them in the order of your preference. Usually, entertainment, hobbies, and dinners come under the discretionary expense category. Have a look at your bank statements to know how much you spend on this category. Since you have an irregular income, so it would be wise to be on a spending diet and reduce your discretionary expenses.
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3. Spend your previous month’s income
Once you have calculated your necessary and discretionary expenses, calculate how much you earned last month. Use your last month’s income to cover your next month’s expenses. This way you’re budgeting on realistic figures. There is no place for imaginary figures or projections.
Now the big question is – what will you do with your present month’s income?
Well, the first thing you need to do is calculate how much you need for your bare-bones budget and discretionary spending. Deposit this amount in a regular checking account just after receiving your paycheck. Although you have a fluctuating income, you have a steady salary every month. This is quite amazing if you think about it seriously. This is your savings. In the past, you might have spent your entire month’s income due to unplanned spending. But not now. You can start increasing your savings gradually.
If your savings don’t increase even after following this tip for several months, then have a look at your bare-bones budget again. It seems something is not right. Either your budget plan is not right or you’re spending lot more than what you’re making every month.
4. Don’t depend on your credit cards
The idea of using credit cards for buying anything you want is quite appealing. But remember one thing, you don’t have a regular income. You have no idea how much you’ll earn next month. You’re not even confident that you’ll earn even a single penny next month. If you use credit cards and promise to pay something later, then you’re just inviting a big trouble in your life.
You can use credit cards as long as you can pay in full every month. Can you do it every month? You have an unstable income. If your income is less in the next month, then how will you cover the purchases you made in the last month?
If you repeatedly fail to pay your credit card bills every month, the compounding interest will increase your outstanding balance. The consequence will be disastrous. Your outstanding credit card bills will have a direct impact on your credit score. Your creditors will either call you or assign accounts to debt collection agencies for collecting payments.
In such a scenario, you’ll have 2 options:
The first option is to negotiate with creditors and arrange an affordable repayment plan.
The other option is to get help from a debt management company to help you get a good repayment plan.
The choice is yours.
If your negotiation skill is not that good, then it’s better to enroll in a debt management program since that would help you avoid any hassle. Just keep it in mind a few points:
- You have to pay a fee to the debt management company
- You need to do research and find out a reliable debt management company
- Always remember you have to act as per the instruction of the debt consultants
- You have to follow a budget. Yes. You have to follow a budget even now
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5. Set up an emergency fund that can last up to three months
People with irregular income tend to worry about how they will budget their earnings next month. After all, there is no assurance that your budget last month will be the same in the next one even if your expenses will be the same. What if you lose one of your income sources? What if something happened to you and that you will be unable to work for a month or more? How would you feed yourself and pay your bills?
Setting up an emergency fund is very important, as it cushions your expenses when something bad happened to you or your finances unexpectedly. The basic amount recommended for an emergency fund is about three months worth of your living expenses. If your paycheck per month can handle more, aim for a longer number of months that your emergency fund would cover. The basic is three months, but if you can, aim for at least 9 months because there is no assurance as to when you’ll be able to earn again.
If you’re having a hard time saving, include at least 15% of your paycheck to your emergency fund every time you receive your paycheck. This way, you’ll be able to save money, but will not heavily affect your monthly needs.
6. File quarterly taxes
Entrepreneurs usually allow a portion of their money to pay business taxes. They have a reason to set aside money as they are required to pay for taxes at the end of the year. Employees with a steady flow of income can count to their companies to handle their bills. However, what about freelancers or other people with an irregular source of income? What kind of financial treatment should they do in order to not owe IRS a big debt?
Some recommend paying your taxes quarterly instead of annually. This way, you will only owe taxes to the IRS at least three months at a time. You will not be buried in debt, as well as fines for late payments. Paying taxes quarterly will also reduce what you have to pay for the period. You can also opt for tax payment assistance as early as possible to be able to negotiate your situation to the IRS.
If you’re not sure whether you can still earn the same amount of money each month or not, paying your taxes in four payments would be more beneficial to you. You can still opt for annual payments, but be ready for a bigger lump sum of payments that you need to prepare.
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7. Stop “rewarding” yourself
There are times when bonuses and other money outside the money you’re received as your “income” are very easy to spend. You treat your friends out of the bonus that you received for a job well done. Or maybe, you can treat yourself once in a while to that fancy restaurant that you’ve been hearing about. And last but not least, new stuff is always a good way to reward yourself for the effort that you’ve done in the past month.
One of the biggest mistakes that a lot of people do is their misconception of bonuses. This also applies to money that they received without doing anything (e.g. found a $5 bill while walking). This money can also be called as “income” and therefore, should be considered as such. You can include this kind of money in your savings or add it in your budget for the month, whatever you prefer.
“Stop rewarding yourself” means that you should also treat your bonuses and other easy money as a saving component. Stick to your savings plan, if you have any, even if there is additional money to income. Remember, you don’t know when you’re gonna need that $5, so save it and be more secure during the rainy days.
8. Find patterns in your income
As an entrepreneur, you might find a seasonal occurrence of sales based on your products or services. If you sell Holloween costumes, it is not hard to expect seasonal sales at peak during November, when your product is in-demand. On the other side, you’ll also know what months will be a hard time for your business. It is safe to expect poor sales in February if you sell Holloween costumes.
This also applies to all freelancers out there. By taking a look at your work history in the past two years, you will see a pattern as to when your income drops and when your income is at its peak. This is an important habit to do because history repeats itself.
By finding the patterns of your income, you can expect that you’re going to have lesser sales during February (as per the example above). Meanwhile, you can expect peak sales in November. By knowing the pattern of your income, you can plan ahead and make adjustments for your money. This way, even if you have irregular income, you can save a little to prepare for the bad months. In addition, you will know when to save a lot when you know your peak months.
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9. Avoid getting debts
Getting an irregular income each month might not be ideal for some people, as their spendings and savings will also be varied. There will be times when your budget is not enough to make ends meet and pay for your bills and other expenses. Regardless of your income, your utility bills will not wait for you. In such unfortunate cases like this, you will see yourself getting desperate for the fund and considers borrowing money from others.
This hard situation makes you think that you’re out of option and the only thing you can do is to borrow money from other people. That might not sound too bad, especially if you’re borrowing from someone close to you. However, consider this, instead of getting a surplus in the following month, you will also get another deficit. In addition, you also need to pay the debt you owed at the start of the month. What seems like a harmless debt will become an endless cycle of payment and debt.
If you can, instead of getting a debt, you can cut your consumption of energy, water, unnecessary stuff, and other things. Lessen your expenses instead of borrowing for more income. This does not only apply for people with irregular income. This also applies to people with regular but insufficient income each month.
10. Set a money buffer
Setting a money buffer is a good idea as it promotes savings during the good and bad days. The concept of money buffer is quite similar to the concept of an emergency fund. However, instead of making it a top priority, this money buffer is something that will help when the emergency fund failed to cushion your expenses.
Your emergency fund is based on your project monthly expenses from the bare-bones budget that you prepared. When something unfortunate happened and you cannot work for one month, the emergency fund will be able to cushion month’s worth of expenses, depending on how many months did you accounted for during your planning of emergency fund. However, what if the expenses in the current month exceeds that of the previous or the projected monthly expenses?
This is where the money buffer comes to shine. When the emergency money also fails, the money buffer can be used to pay the excess payment. Ideally, it is recommended to drop at least 25% of monthly expenses to the money buffer. However, if you’re having trouble financially or if your income is not enough to allow more on money buffer, any surplus from your income (after all the expenses, savings, and leisure are accounted) will be a great addition to your money buffer.
11. Zero-based budgeting
Discretionary purchases are probably the biggest enemies of people who are trying to save. Online shops can always find a reason for a “sale” while stores can tempt you to buy something that you don’t currently need. These habits can be a hurdle to your saving journey, as well as a big no-no for your irregular income. In addition, you will regret buying unnecessary stuff during your bad months when your irregular income is at its worst.
Zero-based budgeting uses the concept of “not purchasing more than is absolutely needed until you’ve saved up the money.” This is important during the early months of saving. This budgeting always assumes that you don’t have money for a purchase of discretionary items. You will focus on how big you can save rather than how big you can spend.
However, it doesn’t mean that you’ll actually give up on your discretionary purchases. Instead, make sure to only get your discretionary items when you finally saved up a considerable amount of money. Instead of a monthly clothing allowance, you can consider setting up a clothing allowance every four months to enable savings to build up. This will also help you control your urges to buy something that you don’t really need.
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12. Pay more of your mortgage
There are a lot of surprises waiting for you when you have an irregular income. Last month, you can barely keep your expenses together because of financial distress. Then next month, you can’t even decide where would you put your surplus after all your expenses (including your discretionary, emergency, savings, and money buffer). Everything is possible because anything can happen when you hold your own time.
If you have a sizeable amount of surplus, it is recommended to pay more of your mortgage instead of saving it or using it on other things, unnecessary or not. Paying mortgage is a pain in the neck, as it can get a lot of money from you in just one month. However, the faster you clear your mortgage loans, the faster you can relax. With additional payment during your good months, you’ll be able to speed up your mortgage loan and become even more independent financially.
Paying for a mortgage is also, in a sense, a way of saving money. But instead of saving money in the bank or in stocks, you will be saving your money in real estate. The bigger you pay your mortgage, the faster you would you’ll be making payments, and the shorter time you would have to endure to pay for your house.
13. Have a “frugal recipe list” ready
And last but not the least in the list is to always make sure that you have a “frugal recipe list” ready in case you really need to save for the current month. Frugal recipes are dishes that you can cook for as low as $5, and lower if you can’t really spare another dollar. It can serve up to 4 people, healthy, and flavorful. Living frugally is sometimes a necessity when you have an irregular income.
The usual frugal recipes include cheap items such as chicken meat and beans or other cheap but fulfilling food ingredients. Because some of the known frugal recipes can be made in batches, you also have the option to freeze servings and just reheat it for quick dinners. Frugal dinner recipes are great for cheap, easy, and quick dinners. Most frugal recipes only cost under $1 per serving, so if that doesn’t excite your saving endeavors, then I don’t know what will.
If you have a family, and a big one at that, frugal recipes can also help you in feeding a lot of people with cheap ingredients. Knowing at least one frugal recipe is expected to save you during one of your financially darkest days.
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Life is like a ride on a roller-coaster, full of ups and downs. You have to be prepared for both of them.
What if you don’t earn a penny for a few months? Who will buy food for your family? Build an emergency fund so that you have 6 months of expenses on hand.
Create a savings account so that you can build a fund for the rainy days. This is a separate account. After you have deposited your paycheck in your checking account, don’t forget to transfer 10% of that money into the savings account. Bad months may come along, the emergency fund will help you survive those months and be on the right financial track.
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