Budgeting is hard, but it can be harder when you have irregular income. When you do not have an idea of your total incomings in a particular month, you cannot plan your expenses ahead. Self-employed and freelancers often struggle with budgeting.
Planning your monthly spending without knowing how much you will earn and how much you will get paid is exceptionally complicated.
For many of you, budgeting with fluctuating income may seem to be impractical. However, there are ways that you can use to empower yourself financially.
To start budgeting, you need to know about your incomings and outgoings. Of course, you cannot calculate the average income and spending from the get-go.
Once you have six months worth of income and expenses recorded, you can get to know the average earnings and outgoings.
You need to add up the figures and divide them by six. Once you have got to know the average income, make sure that your expenses do not go beyond that, and this is why you need to know the baseline. The rule of thumb says that your earnings must cover all of the essentials.
They include rent, mortgage and other debt payments, utilities, groceries, childcare, and transportation. You must need a certain amount of money to get by.
You can cut back on your discretionary expenses but cannot essential costs. Knowing how much money you need every month will help you create a zero-sum budget.
Once you have created a barebones budget, you should think of inessential expenses like entertainment, vacation, eating out, and the like.
Instead of letting yourself free about these expenses, you should not spend more than what you are left with after meeting all of your essential expenses.
Take a look at the income of a previous couple of months to see how much money is going toward discretionary expenses. It is not surprising that you end up with a lot of money going down the drain.
Credit cards are to blame for overspending. Make sure that you revise your spending to ensure that you get by without any problems.
Regardless of how much money is coming in, you cannot ignore the importance of creating an emergency cushion. This will help you tide over during a rainy day. For instance, you do not get enough projects from your clients or come up with a medical emergency.
Although you can take out loans for bad credit with no guarantor when you need money for an emergency, you must have some money set aside because this can help you avoid paying interest. It is always suggested that you should set a certain percentage for saving.
Since you are a freelancer, you will be earning weekly or bi-weekly, and hence it may not be easy for you to set aside the set limit for your savings.
In that case, you should transfer a chunk of your income to your savings account every time you receive your paycheque until you achieve your goal. If your income is not allowing you to stash away money, you need to increase your income sources.
As you do not know how much money you will be earning every month, experts suggest that you should live on your last months’ expenses.
Once you have created a zero-sum budget and you have got to know how much you need for your essential expenses to get by without dipping into your savings, you can deposit that money into your account every first of the next month.
You will have to use that money to make ends meet without using the paycheque that you keep receiving in that particular month. Note that sometimes you may have earned a good amount of money.
In that case, you do not need to be flexible with your spending until it is very necessary. The extras should be transferred to your emergency cushion.
Just because you have created a budget, it does not mean that you can sit back. Despite a barebones budget, you will likely end up spending more than you need. If you do not have cash, you will use your credit cards.
Do not rely on future income because this can throw you in at the deep end. You do not need to track everyday expenses. Take a look at your bank statement at the end of the week to ensure that you have not spent beyond your weekly limit and if you have done it, adjust it in the coming weeks.
Budgeting is not essential just when you have irregular income. Even if you have a full-time job, you must create a budget to ensure that you are not spending more than your earnings.
This may help you tide over during financial emergencies, for instance, when you lose your job. This can prevent you from taking out loans for the unemployed too, and if you still need it, you may not need to borrow a high amount of money.