Let's be honest. Budgeting gets a little easier when you have a steady income, and you can familiarize yourself with careful planning. If you are self-employed, understanding what it's like to have steady income can be challenging. You might be asking yourself questions like: “I don't have a regular paycheck, can I even set up a normal budget? Should I even take the time to attempt it?” The answer to these questions is ALWAYS yes.
A working budget does depend on income; however, it's also a way for you to figure out how much money you need to live the life you want. You then rearrange and tweak the numbers, so you don't exceed your limits. The money you do have coming in should always work for you, not against you. You tell your money where you want it to go based on the things that are truly important to you.
If you have irregular paychecks, you need to be budgeting. That's the simple answer. If you are a freelancer, a temp worker, an artist, a salesperson who depends on commission, a seasonal worker, a cosmetologist, a consultant, or own your own business, then most likely you have fluctuating income. What do you do when most of your income is entirely dependent on how much tips you make in one night? If you are in any of these positions, then this article might help you.
There are three essential steps that you need to follow to set up a realistic working budget when you have irregular income.
STEP 1: FIGURE OUT YOUR MINIMUMS
I like to call this “knowing your starting point.” When your income is predictable, you usually budget your money by creating spending categories within that limit. When you are working with unpredictable income, you almost have to work backwards. Crazy right? You start the process by figuring out how much money you spend to know how much money you will actually need. You have to look at budgeting as a balancing act. No matter what, one side of the equation has to be consistent at all times. For example, if you have a steady income, then your expenses can fluctuate. If your income varies, then your expenses have to be consistent and fixed. You can make your expenses consistent by turning them into things that are stable, predictable, and repeatable. The thing that helps me is making sure that my expenses are repeated every single month. They don't change.
When figuring out how much money you spend on expenses, you should only look at the expenses that are necessary, things that you absolutely need to live. Your “starting point” expenses are things that are essential.
When looking at your food expenses, don't include things like coffee, eating out, fast food or alcohol. Try to budget using the lowest food cost that you can. If you plan on couponing or using money saving apps, make sure to take that into account, but if you have no plan on saving money couponing, make sure you always focus on being realistic. A $10 pizza is not $5. I used past bank statements to give me an accurate idea of how much I was spending on food essentials. If your bank statements are useless, track you spending for the next three weeks. Write everything down, and I mean EVERYTHING. This will give you the best overall estimate of where your money is going.
Are you surprised to see this as a necessary expense? Have you ever read that the number one reason people go bankrupt is due to medical costs? Well, it's true. I know first hand how important it is to have medical insurance. A shattered wrist, a bruised pelvic bone, two black eyes, and a $23,000 medical bill opened my eyes. Hopefully, you will never experience something of this magnitude. Include health insurance in your “starting point” expenses, as well as any past due medical bills.
This is the same for almost everyone. Rent and mortgage are a reality for most people, so make sure to include this in your necessary expenses. If your homeowner's insurance is not paid with your monthly mortgage payment, make sure to add this to your expenses. If you do any work from home like I do, make sure you include expenses such as phone and internet. If you do include phone expenses in your budget, make sure to shop around and get the best deal. If you are married or have a significant other, sharing a plan can be a little more affordable.
Do you need to drive to work every day? If you do, you will want to include gas expenses in your budget. Looking at your past bank statements will give a pretty good estimate on how much money you are spending on gas every month. I know I fill up my car about three times a month, so that works out to be around $160 for gas expenses every month. This is a great category to look over and start eliminating or reducing expenses. Do you really need a car or is public transportation available to you? Look over your auto insurance. Do you really need all of that coverage with the lowest deductible? Give your car insurance carrier a call and find out your options and consider shopping around to find a lower rate. It's great to cut costs, but make sure you are still realistic. Don't sell your car thinking you will take public transportation, only to never get on a bus.
Once you have all of your “starting point” expenses listed, its time to add them up. This will tell you how much money you will need to pay yourself every month. Essentially, this is your paycheck.
STEP 2: WHAT'S YOUR INCOME?
This part is a little harder, but not impossible. When your income varies every day, it's hard to grasp how much you make every month. If you work for yourself, there are some people out there who will tell you to add how much you will need to pay in taxes to your “starting point” expenses. You can use an online calculator like this one to calculate those monthly tax costs. The main thing I want you to focus on today is getting a handle on how much income you make every month. For this, I want you to concentrate on the big picture.
For four weeks, track every dollar you actually make. Get a journal or create an online spreadsheet and record your income every day. After four weeks, total up your income and find your average monthly income. Now, if you don't want to wait four weeks, and have kept accurate records of your income thus far, look at your past records to come up with this figure. Finding your monthly average will help smooth out the differences you may be experiencing every single day.
If you have kept long enough records, take it one step further and do another 4-week average. Compare that figure to the first four weeks, and this will give you a pretty good idea on how your income varies. This will also help you establish a margin of error for your budget.
When creating your budget, it's always best to use values that assume the worst case scenario. What do I mean by that? When figuring out your income, you want to pick the lower of the averages to use for your budget. If you use the highest average, you might run into the issue of coming up short for the month. So use the lowest average, just to be safe.
STEP 3: SAVE WISELY
It's never too early to start saving. If you find that you have extra cash at the end of the month, make sure you are putting money aside for an emergency fund. It's also not a bad idea to set some money aside into an account just in case you do come up short at the end of the month. This account could be used as a cushion to make sure your monthly essentials are getting paid. I call this an “uh-oh” account. I still work full time, but my business expenses are paid only with business income. If I make more money than what I expected for a month, I will put the difference into an “uh-oh” account to cover expenses when my business income is lower than anticipated.
Having multiple bank accounts has helped me keep track of spending, and has allowed me to keep my budget organized. I currently have six bank accounts, and it has made my life so much easier.
All of my business income gets put into this account. I use PayPal for business transactions, and they make it easy to transfer money directly to my business checking account. I have all business related expenses taken automatically from this account every month, and if there is money left over, I allocate it towards one of the other bank accounts listed below.
Since I still work 8-5, all paychecks from my day job get put into this account. From this account, I pay all essential bills, and most of my transactions during the month happen from here. All work-related bonuses or extra income that is made outside of my business also get placed here. Once my income exceeds my target for the month, I transfer money to one of my savings accounts.
Once a month, after I have paid myself for my necessary expenses and have transferred money for other financial priorities, I put money into an emergency savings account. I am still working on hitting my target goal of at least six months of net income, and this account will only be used for some these situations:
- Lost job
- Medical or dental emergency
- Loss of primary transportation
- Emergency travel expenses
- Unexpected child costs
Read: How to Build an Emergency Fund (Step-by-Step Guide)
I have a couple of expenses that I like to pay only twice a year to cut costs. My car insurance is one of these costs. I take the amount of my car insurance bill and divide it by 6. So if my car insurance is $600 every six months, I set aside $100 every paycheck into this account to make sure I have enough money to pay the bill once it comes due. I also use this account to save for other important goals such as a down payment on a home, paying off my car, and vacation expenses.
These are the four primary bank accounts that I use. I also have an “uh-oh” bank account like the one I mentioned above in this article, and I also have a “child” savings account where I put any money I have left over after all of my other accounts have been funded. Once the child savings account has hit $1000, I transfer $500 into my son's UTMA.
Having inconsistent income does not mean budgeting is impossible. Use the steps above to create a plan for your money.
Do you have daily paychecks? Tell me how you are managing your money in the comments below.