Whether you’re a freelancer, you’re self-employed, or you get paid based on commissions, the chances are that you’re never quite certain how much money you’ll make from one month to the next.
Although any profession with a fluctuating income can be rewarding, it’s difficult to budget when you don’t know how much you’re going to earn.
In February, you could earn enough money to pay all your bills for the next three months, but by the time you hit September, you’re facing a seriousdry spell. If you’re one of the many people dealing with the complexities of an unpredictable income, here’s what you need to know about budgeting.
Have a Baseline
The first thing you’ll need to do when you’re creating a budget on a fluctuating incomeis determineyour baseline. Your baseline is the amount of cash you absolutelyhave to have each month to make sure that you can pay for essential expenses like your rent, your mortgage, your utility bills and so on.
Creating a baseline budget isn’t as hard as it sounds. Simplygrab a piece of paper and a pen or open the note app on your smartphone and list everything you can’t live without each month. Remember to include insurance payments and extra cash for irregular yearly expenses too.
If you have a loan, you’ll need to keep that in mind. Just make sure you’re paying as little as possible in interest. Companies such as Readies can assist you in these matters to make sure you’re getting the best deal.
Calculate Your Discretionary Expenses
Once you have your bare-bones budget, you can start coming up with a list of expenses that covers everything else. For instance, how much do you spend on your various TV subscriptions, your weekly entertainment options, and your hobbies?
Be as honest as possible when it comes to calculating how much you spend on the “unnecessary” and luxury items that you get each month. While it can be difficult to come to terms with your spending flaws, you’ll be better off in the long-term if you know which areas you need to cut down in. You’re sure to find at least one or two leaks in your spending that you can work on.
Develop an Emergency Fund
When you’re not sure how much you’re going to earn each month, it’s essentialto have a safety net. Most financial experts suggest that everyone should keep between three and six months of expenses in their savings just in case. This rule applies even if you have a steady income.
To make sure that you have an emergency fund that you can readily tap into, you might decide to automatically send a portion of your income each month into a separate savings account. Thisis a great way to make sure that you don’t accidentally spend the money that you’re trying to save. If you’ve earned a lot extra one month, consider saving a little more than usual – just in case.
Live on the Income from Last Month
With your bare-bones budget in mindand the “luxury” expenses that you want to continue with, you’ll know how much cash you need to spend each month to keep everything running smoothly- without tapping into your savings. With that in mind, deposit the exact number you need into your current account, and put anything else you might have into your savings.
This way, you can live each month on the income of the month before, so that you don’t have to spend each week worrying if you’re going to make enough cash to pay the bills. What’s more, because you’re forcing yourself to live according to your budget, you’ll be more likely to save the extra cash that you earn, rather than splurging it on something unnecessary.
Make the Most of your Extra Cash
Finally, if you follow all the steps above carefully, then you’ll hopefully end up with extra money at the end of each month that you can do what you like with. One option is to simply save everything into your emergency fund. You could also split your savings into an emergency budget, and a savingsaccount for your short and long-term goals.
Another way to use your extra money may be to pay off some of your debt. The quicker you can get yourself out of any loan obligations, the more money you’ll have to save each month, because you won’t be paying for unnecessary interest fees. Thiscan be a great way to reach your goals faster.