Budgeting is an important step everyone should take to make sure they are managing their money properly, and it becomes even more important when someone doesn’t have a stable income.
Sales people who receive only commission, freelancers and various other occupations need to handle their money effectively while their income is unstable.
Making a Budget
The first step for anyone with a variable income to take control of their finances is to figure out their monthly expenditures. This is the opposite of what most people do – calculate how much they’ll get paid each month and base their spending on that.
Monthly expenses should be grouped into 3 categories: (1) essentials, (2) discretionary spending and (3) emergency savings.
The ‘essentials’ category would have things that need to get paid and are not optional. They would include things like: mortgage/rent payment, property taxes, utility bills, clothing, groceries, vehicle insurance, fuel and medical costs.
The ‘discretionary’ category has things that aren’t essential but still nice to have. They include dining out, cell phone bills, internet, gym membership, satellite radio and any other monthly expense you currently have that isn’t required but is still nice to have.
The emergency fund is important for anyone to have and becomes even more important with an unstable income. When no income comes for a month or two or an unexpected expense comes up – it can be great to rely on. Most experts recommend setting aside 10% of expected monthly income (or more) as an emergency fund.
Using Separate Bank Accounts
Normally I don’t recommend having separate bank accounts, but with any type of business it is much easier to manage by separating personal transactions from business ones.
A side benefit is that you can more clearly see what amounts are going into/out of the business (and what they relate to) if there is a separate bank account.
Most experts agree it makes sense to have a business account, personal account and an emergency savings account.
Once you have your expenses outlined the next step is to set a goal for your monthly income. You’ll want to use past performance to gauge how much you can reasonably earn in one month.
In a perfect world you would earn enough each month to pay for all your essentials (rent/mortgage, food, etc) with some money left over for spending and emergency fund savings.
In reality this might not happen, which means you’ll either have to figure out a way to earn more or simply learn to live with less.
How Budgets Relate to the Weather
For someone who has an unstable income, I would compare it to someone who works outdoors in an area that has dramatic changes in weather – like the prairies.
When preparing for work each day you’d want to look at the weather forecast to make sure you are well-prepared for whatever weather is coming your way. If you can’t predict the weather with 100% accuracy, you’d want to dress for a worst case scenario – if there is a chance of rain in the forecast, you’d want to pack an umbrella (even if it may not rain).
Preparing a budget is the same – a monthly budget is your weather forecast that you would use to make sure you’re well prepared for a worst-case financial scenario. If you don’t know what your monthly income will be in the future, you’d want to budget for your expected income (regular weather) but also to be prepared for a much lower income (bad weather).
Michelle Blackmore, accomplished financial writer and fan of the site, had the following tips:
– Live on the last month’s income: Develop the habit of meeting your current month’s financial obligations with the last month’s paycheck. This would give you one month’s breathing space. If your business is not doing well in this month, then you can change your budget plan and be prepared for the next month’s expenses. You can try to find out ways to increase your income.
– Make your budget flexible: Life happens and things change. Your budget needs to reflect this. A budget should be reviewed regularly to make sure it’s still realistic and reflects your current situation. If your income has gone up (or down) with the seasons, be sure to update your budget accordingly.
What tips do you have for budgeting with an unstable income?