TL;DR
- Start budgeting for irregular income by paying yourself. Maintain a separate personal and business account to avoid mixing your personal spending and business funds.
- Understand your income pattern and set a baseline for fixed personal expenses, dues, and insurance. Also, set aside a portion for business development.
- Build an emergency and buffer fund to tackle unexpected expenses and keep yourself afloat during income dips.
- Grow your finances with varied investment vehicles. Invest in a combination of monthly contributions and lump sum. Lastly, review and adjust your budget periodically.
- Address common mistakes like relying on best months, neglecting irregular expenses, looking to borrow, not planning taxes, ignoring insurance, etc., while budgeting.
Budgeting with Irregular Income
The freedom of being your own boss is unparalleled. You have control over your work-life balance. You can spend more time with your family and indulge in things that matter to you.
Along with these perks comes the challenge of juggling your expenses with irregular income. As a freelancer, consultant, or business owner, the struggle is unavoidable. There are months where you are overjoyed with how much you make, and then there are the lull months. Not to forget the uncertainty that comes with chasing payments.
How do you manage your monthly expenses steadily with such unpredictability? This is where the right budgeting approach helps. And no, it looks very different from the typical “track and cut your expenses” advice you may often come across. You want to create a budgeting system that works for your inconsistent income. Read on to understand the step-by-step approach you can follow to budget for irregular income.
Steps to Budgeting with an Irregular Income
Despite the inconsistency in your income, you can establish stability in your money habits. Here’s a step-by-step approach to budgeting like a pro and curbing financial stress:
Step 1: Pay yourself a salary
Your income isn’t stable, but your approach can be! Even if your income arrives sporadically, you can pay yourself a salary every month. Regardless of your project size, you’ll have a fixed figure each month for personal spending. You can have a separate savings account where you credit this amount. The account where you receive your payments can be your business account.
The separate account is your personal account. You can use the salary you credit here for your monthly living expenses, emergency fund, investments, and self-care. Budget it like you would a regular paycheck.
The business account will help you manage your income and budget for business-related expenses.
Step 2: Understand your income pattern
Pull up your bank statement and look at your cash inflow for the last 6-12 months. From here, you can calculate your average income to give you an estimate of how much you typically make and balance the highs and lows. Then, identify your lowest income. That is your baseline for core spending and investments. This way, you can have a safety-first budget, and the slower months won’t throw you off.
Step 3: Prioritise your expenses
Once you recognise your income pattern, it’s time to decide what gets paid first. You can start with the non-negotiables like, your rent, food, utilities, insurance, etc. You also want to account for any dues, as accumulating debt can quickly knock your finances off balance. Everything beyond this is discretionary. Locking in the core expenses gives your budget a strong foundation.
Step 4: Set aside a portion for business growth
While covering your personal expenses keeps things running, your business growth is what keeps the money coming in. Think of it as part of the job. Half the work is delivering, and the rest is building your business for tomorrow. Make it a habit to assign 20%-30% of your income to marketing, sales, skill development, and other business development efforts. These are investments for higher-paying work down the line.
Step 4: Build an Emergency & Buffer Fund
You’ll need to dual safety net when you earn irregular income. First, emergency fund of 6 to 12 months of your monthly expenses. This fund is mainly to manage scenarios like medical mishaps, home repairs, vehicle breakdowns, etc. The other one is a buffer fund for your business that you can draw on when your income dips below your baseline. You can aim to build a fund of at least 3 to 6 months of your lowest income.
Step 6: Invest to Grow Your Finances
Once your essentials and safety nets are addressed, shift your focus to growth. Each month, try to invest as much as you can, even in a small amount. You can automate these investments to stay consistent. In months when revenue overshoots, invest more. In your great months, you can invest in a lump sum and build long-term wealth. Use a combination of investment vehicles to diversify and balance risk.
Step 7: Track, review, and adjust
Making a budget is a continuous process. You can’t let it run on autopilot. You want to review your finances regularly to see if you’re on track with your budget. You can check where you overran, where you had surplus, and where you need a change in your approach. Considering these points, rebalance your baseline, your expenses, contingency funds, and investments.
Common Budgeting Pitfalls to Avoid When You’re Self-employed
As you follow the simple budgeting plan for your irregular income, don’t let these slip-ups get in the way:
- Basing your lifestyle on your best months
When we’re self-employed, we have those moments where we feel we’re doing well for ourselves. Don’t let those peak months trick you into overspending. Always stick to the baseline.
- Neglecting irregular expenses (even if small)
Occasional outings and splurges are fine. It becomes a problem when they occur almost every other day. So, maintain a buffer for those in your budget and avoid exceeding this limit.
- Considering debt to bridge gaps
It’s tempting to turn to Credit Cards or take a quick loan when income is tight. You don’t want such short-term relief to hamper your peace of mind in the long run. A better option is to fall back on a buffer fund or to delay non-urgent expenses.
- Not planning for taxes
Taxes don’t feel urgent until the panic of tax season hits. You can avoid the scramble by planning with a profit and loss statement, balance sheet audit, and setting aside funds based on your tax liability.
- Waiting for a stable income to start investing
The greatest misconception of investing is to wait until you have enough. The truth is, there’s no perfect figure. Even with irregular income, you can decide your regular contributions, however small. You can then boost your investments when your income overshoots in the great months.
- Ignoring insurance
No matter how tight money gets, skipping insurance is never an option. Term and health insurance are essentials that offer financial protection when it matters, while letting you keep your savings intact.
Say Yes to Budgeting with Confidence!
You can always tailor your budget to match your circumstances. The beauty of coming up with a budgeting and financial savings plan is that there is no one-fits-all formula. Also, it has nothing to do with stability. If you plan well with setting a baseline and prioritising an emergency and buffer fund, along with insurance and investments, you’ll be good to go. All the steps discussed above will guide you on how to approach this for your irregular income.
Don’t wait to take control of your finances. Do it now, and direct your income to places where it thrives!
If you find yourself stuck at any step, let’s connect and we’ll work through it together.