HOW TO BUDGET ON AN INCONSISTENT INCOME

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Whether you are a freelancer, a consultant or a self-employed worker, you are probably going to experience a lot of irregularity in the flow of your income. More than once, you will not know how much you will earn or even when you will earn it. Because of this, it’s easy to believe that budgeting just cannot work for you.

A budget helps you manage and control the flow of your money albeit an irregular flow. It is especially important on an irregular income because when you are unsure of the next pay, you absolutely must make the best use of your money. So how can you budget on an inconsistent income?

Know your minimum income

Whatever budget you create will be created based on your minimum income. If you have been earning irregular income for a while, first consider what is the least amount of income you are sure of. That is whatever may, X amount is a sure income. This amount is what will inform your budget. The good thing about this is if you make more than the expected income, you have more money to spend on other things and if you don’t, you’re good.

Create a Barest Necessities Budget

On a predictable income, you can budget by allocating specific amounts or percentages to different categories within the limits of this income. For example, because you receive X amount every month, you plan that for the next couple of months here’s how much you’re going to spend on living expenses.

With irregular incomes, you budget backwards. You figure out how much you need to live and then budget that amount. So, you start with a bare bones budget. This involves the most minimum amount of money that is required for living essentials you need to survive/work. Think really frugally when creating this budget so it prepares you for the worst that can happen.

Depending on you, this bare bones budget might include eating home, taking the bus instead of a cab, skipping on new outfits, get a cheaper data plan etc. Even if your income is unpredictable, your expenditure should be predictable.

Now take a look at your bare bones budget / minimum living expense again. If you were to make that same minimum income again, would you still be able to survive? If yes, then good. If no, you probably need a plan.

Create a Fall Cushion

The truth is there will probably be times when you make next to nothing. You might decide to take on an extra job but that doesn’t always work out and you might burn out soon enough. You can however consider creating a fall cushion in the event that you are unable to pay for even your bare bones expenses.

A fall cushion is similar to an emergency fund, that supports you when you’re high and dry. How do you go about it? When you get your next paycheck, remove the money you need to pay for your minimum living expenses. If there is an excess, remove again the money you need for your minimum living expenses but this time put it into a separate account. That way, in the event that you do not make as much the next month, at least you can pay for your bare bones expenses.

Debts, Emergency Funds and Discretionary expenses

After your bare bones expenses, what comes next is your savings and discretionary expenses. If you notice, what you did in the previous steps was to separate your living expenses, your savings and your discretionary expenses which is basically what the 50/30/20 rule to budgeting guides you to do. From the 50/30/20 rule to budgeting, not more than 30% of your income should go to discretionary expenses. So decide what will be the best use of your money. Do you still have debts to pay? Have you saved something? Have you paid taxes?

Irregular income can be tricky to budget on but regular income is equally tricky to budget on. What matters is to get control of your money and gain financial freedom.

The RenMoney Blogger,

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