How to Budget Even When Income is Unpredictable
Any search engine will turn up hundreds if not thousands of tips for budgeting your paycheck, but with today’s growing entrepreneur, self-employed, and freelance crowd, you might be a little more hard-pressed to find solid tips and tricks for establishing strong finances when your paychecks are a little more unpredictable.
That’s because today’s workforce faces a largely different landscape than even their parents’ generation. Twenty and thirty-somethings can now go through their entire career without the reliability of the nine-to-five, two weeks of PTO, and a steady $2,000 directly deposited into their bank account biweekly at midnight.
So what happens when, say, there’s two months between freelance gigs? Or you have to factor in self-employment taxes on 50% of your household’s income? Or you didn’t move as much product last month because you got pneumonia?
If you find yourself in a rather unpredictable situation when it comes to cash, here are some tips that will keep your budget strong.
Understand the importance. Sure, a budget is important for everyone, but if you’re an entrepreneur or self-employed, it’s even more crucial. With regular workers there’s still the possibility of sudden lay-offs, termination, or sickness that can threaten employment status. But these threats are expounded for those with less predictable income. Weeks can fluctuate. Sometimes you roll in gigs, others it’s as dry as the Sahara. You first have to understand how significant having a budget is before moving on to the following tips.
Get friendly with your baseline. With steady employment, you allocate income within a limit to certain categories. When your finances are less reliable, you have to work backwards from the norm. You have to look at each category to figure out how much you need to make, at a minimum, in order to cover your monthly bills. Baseline items include:
- Health insurance premiums
Also remember to include any expenditures incurred monthly for business, like Internet, phone lines, rent, etc. These are non-negotiable items; you can’t do business without them.
Create your own reliability. Your budget needs to have reliability somewhere in it, and since it won’t come from a steady bi-weekly paycheck, your expenses have to be the stable part of the relationship. Focus on making monthly expenditures stable and repeatable from month to month in order to know exactly how much you have to bring in to cover those expenditures.
Squirrel away. Conventional wisdom based on conventional income says you should have, at a bare minimum, three months’ worth of income stashed away in an emergency fund to cover any unforeseen financial hiccups. However, when money’s a bit more unreliable, it’s a good rule of thumb to have much more than that as a backup, anywhere from nine months to a year’s worth. This fund will help you get by between freelancing gigs or if your business turns belly-up.
Prioritize. This one is going to seem simple and straightforward, but it bears mentioning nonetheless. When you can’t rely on X amount of dollars every month, you have to learn to prioritize. When push comes to shove, and that freelance gig falls through or your commissions are drastically down, what goes first? Cable or Wi-Fi? Daily coffee or dining out? New shoes or a new jacket? Learning what is the most important, say keeping the electricity on, will also reveal what areas you can cut back on. The lower down on the importance scale, the more easily you can let these things go.
Your income might be shaky at times as an entrepreneur or self-employed worker, but your budget never has to be, you just have to prepare for the lean times and plan a little more thoroughly than the average bear. You’ve got this!