If you’re an independent contractor, gig worker, or small business owner, your income probably varies from month to month. While budgeting on an unpredictable income can be tricky, it’s worth taking the time to figure it out.
By creating a budget, you can make sure you’re able to cover your bills while funneling money into savings at the same time. If you’re eager to take control of your finances, here are some tips for how to budget on an irregular income.
Irregular Income Definition
An irregular income is one that varies from month to month (or even week to week). If you’re a freelancer, gig worker, independent contractor, part-time worker, or small business owner, for example, your income probably fluctuates over time.
Seasonal workers will especially see big changes in their earnings. A farmer, for instance, may make significantly more in the summer months than during the winter. A ski instructor will have the opposite experience.
An irregular income stands in contrast to a regular income with fixed paychecks. Full-time employees, for instance, typically have the same paycheck directly deposited into their bank accounts on a regular basis, with the exception of occasional bonuses or commissions.
How to Budget With an Irregular Income
Learning how to budget with a varied income is critical, since it will help you meet your monthly obligations. Plus, it can help you set aside savings that you can use to get through a tough time, pay your estimated state and federal taxes, work toward upcoming goals like going on vacation or making a downpayment on a home. Here are the basic steps involved.
Establishing Baseline Monthly Income
In order to create a budget for an irregular income, the first thing you’ll need to do is establish your baseline monthly income. This means adding up the amount you made over the past six or 12 months to get an average monthly figure.
Let’s say you made a total of $45,000 over the past 12 months. Diving that sum by 12, you get an average monthly income of $3,750. In reality, you probably made more some months and less other months. But this ballpark number will give you a sense of how much you have to pay your bills, funnel into savings, and spend on other expenses.
Adding Up Fixed Expenses
Next up, you’ll need to take some time to add up your fixed expenses from month to month. These are the bills and other essential costs that you have to pay. They might include:
- Rent or mortgage
- Utilities, like gas and electric
- Internet and cell phone service
- Homeowners insurance
- Car loan, auto insurance, and gas
- Student loans
- Credit card payments
- Groceries
If some expenses are higher in certain months than others (for instance, your gas bill might be significantly higher in the winter), you may want to add up six to 12 months of bills and divide by the number of months to get an average monthly cost.
Adding Up Non-Essential Expenses
Now it’s time to add up your discretionary spending — these are expenses you could live without if you had to. Some examples include:
- Entertainment
- Restaurants
- Travel
- Hobbies/sports
- Subscription services
- Gym memberships
Non-essential spending often fluctuates from month to month so it’s a good idea to add up your spending in these categories for the past six or 12 months, and then come up with a monthly average.
While your fixed expenses represent bills that you have to pay, your variable expenses are ones that would be nice to have after meeting your other financial obligations. If you discover you’re over-spending in this category, you might consider cutting expenses so you can pay off debts or boost your savings.
Create a Zero-Based Budget
One popular method of budgeting is zero-based budgeting. This doesn’t mean spending every dollar you earn until you have zero dollars left.
Instead, it means assigning a purpose to each and every dollar you earn each month. Some of your money will go toward bills and some will go into savings.
Once you’ve covered your essential categories, you can put the leftover amount toward savings or non-essential expenses.
Another simple budgeting approach you might consider is the 50/30/20 rule. With this strategy, you put 50% of your after-tax income toward bills and other essentials, 20% toward savings and debt repayment (beyond the minimum), and the remaining 30% toward your “wants,” or discretionary purchases.
Using Expenses to Calculate an Emergency Fund
Building an emergency fund is critical, especially if you have an irregular income. If you’re a freelancer, for example, you never know if a big client might disappear and leave you in the lurch. An emergency fund can help you weather a dip in your income while you search for new clients.
Since you’ve already estimated your monthly expenses, you can use these amounts to determine how much you’d need to cover your living expenses for three to six months if you were to lose your income. Some financial experts recommend that those who are self-employed, work seasonally, and/or have financial dependents sock away closer to 12 months’ worth of living expenses in a savings account earmarked for emergencies.
You’re probably not going to hit that goal overnight, but small and steady transfers into your rainy day fund will add up over time. Once you reach your emergency savings goal, you’ll have the peace of mind that, should you lose your income or run into unexpected expenses (such as medical bills), you won’t have to run up credit card debt that could take months, even years, to get out from under.
Automating Saving
When it comes to saving money, a “set it and forget it” approach is usually easiest. You can do this by opening a separate savings account (it can be at the same bank as your checking account or a different one) and setting up a recurring transfer from checking to savings on the same day each month.
Since you’ve already estimated your average monthly income and expenses, you can determine how much you can afford to save each month without going into the red. Once you’ve hit your emergency fund goal, you might want to open other savings accounts to save for other short-term goals. Some savings accounts actually allow you to create separate savings “buckets” within the same account.
If your earnings don’t have taxes taken out, you’ll also need to set aside money to pay your estimated quarterly taxes throughout the year. Putting this money into a separate account can ensure you don’t spend it and have enough to send to Uncle Sam come tax payment day.
The Takeaway
Creating a budget when you have an irregular income requires figuring out how much, on average, you are earning and spending each month, then coming up with a plan for how you want to spend and save each month.
Keep in mind that budgeting is typically not a one-and-done activity. It’s a good idea to go over your bank statements every few months to make sure your estimates are still in line with your actual earnings and spending, and to keep tabs on your savings progress.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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5 super smart spending strategies
When it comes to budgeting, some of us live by the saying, “Out of sight, out of mind.” If you can’t see those charges coming through on your credit card, did they ever really happen?
Only two in five Americans keep a budget or track expenses, but burying your head in the sand can only go on for so long.
At some point, bills will be due, and everything will need to be sorted out. Instead of letting your spending hit you like an avalanche, consider adopting some smart budgeting strategies that take the stress out of spending.
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For many implementing smart spending strategies, the first instinct is to enact a strict budget. However, it’s hard to get a true sense of what your budget will look like if you’re not familiar with your spending habits.
You could start by excavating last month’s spending using the highlighter method. Print out statements from credit cards, bank accounts and ATM cards, and armed with an assortment of fun highlighter colors, go through each statement, highlighting by spending category.
There’s no hard and fast rule regarding categories; you might highlight all food expenses one color, or perhaps you want to drill down and dedicate different colors for spending on meals out versus groceries. A simple category breakdown might look like this:
• Household expenses (rent/mortgage, ultities and home insurance)
• Food (groceries, dining out, coffee, etc.)
• Transport (car payments, rideshares, gas, auto insurance, etc.)
• Debt and monthly bills (student loans, credit cards, not including home utilities)
Once you’ve gone through and highlighted by category, you can add up the totals for each. While the numbers certainly matter, the visual can be just as helpful.
Are you highlighting credit card statements like crazy with transactions on food? Might be time to reconsider your eating out budget. Is there an Uber charge every other line? Maybe your spending weakness is your daily rideshare habit.
The one thing you shouldn’t feel from this exercise is shame or embarrassment. Most of us over-highlight in at least one category, or overspend when it comes to specific items. Pat yourself on the back for highlighting the issue, and addressing it.
Not one for paper and highlighter? Your bank might provide a similar budget tracking feature online.
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After you see where you typically spend, then you can start moving forward with a budget. Budgets can seem complicated and boring, but what it drills down to is spending less than you make each month — it’s as simple as that.
While tracking is about examining what you’ve already spent, budgeting is about looking forward to what you will spend. And just like no two people are the same, neither are budgets. Here are a couple of jumping-off points. Try one out, or mix and match a few to find the perfect fit for you.
50/30/20 budget
The 50/30/20 rule breaks down your after-tax income into three buckets:
• 50% on needs
• 30% on wants
• 20% on savings
Needs are defined as things you must pay, as well as items necessary for survival, such as:
• Rent or mortgage
• Car payments
• Healthcare
• Groceries
• Insurance
It also includes minimum debt payments.
Wants are things you spend money on that are nonessential like dining out or entertainment activities. This includes the “upgrade cost” of things.
For example, you might pay for super fast internet or more data on your phone plan. Beyond the bare minimum pricing, these charges fall into the wants category.
Finally comes savings. This 20% can be divided among a few different accounts, including retirement, emergency funds and investing. While minimum debt repayments fall under needs, anything above and beyond that monthly charge can be taken from savings.
While it’s not for everyone, the 50/30/20 rule can be a good introduction to budgeting.
Zero-based budget
Zero-based budgeting is less about percentages, and more about the big goose-egg: zero. Each month, you’ll want your expenses to match your income, essentially leaving nothing left over by the end of the month. Each dollar will be assigned a job as it comes in. Bottom line, if you make $4,000 a month, your expenses should add up to $4,000 a month.
Sounds simple, right? It can be, with a little practice. After tracking your monthly income, you’ll need to take note of your monthly, then seasonal or annual expenses.
Seasonal planning is essential in zero-based budgeting, you’ll want to plan ahead for these expenses and allocate a little to it every month. Once you have your income and costs down, you’ll subtract the later from the earlier.
If this doesn’t add up to zero right off the bat, you’ll need to balance your budget. That might mean taking a look at your expenses and cutting a few line items.
Now, a word of warning. Just because the concept is called zero-based budgeting doesn’t mean you’ll want to end each month with zero dollars in your bank account.
Instead, you should have zero left to budget — meaning if there’s a month sitting in your checking account, it has a job. That could mean it’ll be spent in a few months, or it’s simply getting transferred over to savings.
Budgeting apps and online tools
For the tech savvy, pen, paper and spreadsheets might not do the trick. If you’re looking for a way to passively track your dollars and have access to your budget at the swipe of a finger, you might want to use an app to track your budget.
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Once you’ve started tracking your expenses and budgeting your income, staring at your monthly statements shouldn’t be scary. Instead, find enjoyable ways to maintain your budget and break bad habits around spending.
Sushiman/istockphoto
Shoot for a no-spend day once a week, or see how far you can get in your day without spending anything. This doesn’t mean you can’t leave the house, but it will challenge you to find creative ways to enjoy yourself, without pulling out your wallet.
That might mean hosting a pantry leftovers potluck with friends, where everyone brings something from home. Or, it could mean turning to a local library to check out movies, games, or magazines for entertainment. No-spend days will make you reconsider each purchase you make which could help you save a little money.
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While we tend to be hush hush about spending habits, getting an accountability partner can help you spend smarter. Maybe it’s someone you check in with a few times a month, or maybe you share budgeting tips, either way, bringing your spending habits into the open can make it easier to stick to them.
Plus, cluing in a close pal on your smart saving can help reduce that dreaded sense of FOMO you might get when you miss out on spending opportunities.
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Getting spending under control can bring peace of mind to your pocketbook, but it also makes it easier to save or pay down debt.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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