When it comes to budgeting, the basic rules go as such: Look at your income, look at your expenses, see if there is a difference, and is that difference positive or negative. Go from there, etc. etc.
Although most people don’t want to touch a budget with a 10 foot pole, it can be even more difficult for our friends whose income varies each month. Whether self-employed or working commission only, budgeting when your income goes up and down, up and down, can become a full blown headache. Today, we’re going to go over the basics of budgeting when income isn’t exactly predictable.
1.) What Comes In
Let’s take a look at income. Pull out your records and see how much you’ve made each month over the last year. You don’t want to expect and budget to make $2,500 a month, and only end up bringing home $2,150. So, the safest bet here is to use the lowest paycheck for the past 12 months as your baseline. Meaning that your budget is based on the minimum you can expect. If you had a month where you were out of work due to illness or other emergency and your income dropped significantly, move on to the next lowest month. Months where your income drops in that way is why we have emergency funds.
2.) What Goes Out
Take a look at your spending. We’re going to focus on the absolute bare minimum. We’re talking the essential expenses that you have to be paid in order to live and work. In general, these items are housing expenses, transportation, utilities, food, and insurance. Depending on your place in life, these may look a little different. If you have kids, childcare can be a big need in your budget. In general, I wouldn’t consider Internet access to be a priority, but if you work out of your home, this then leans toward being a need! So take a look at what your household requires. The key word here being “requires!”
3.) All The Extras
Once you’ve figured out what your needs are, it’s time to take a look at discretionary expenses. Now we’re talking that gym membership, dining out, designer clothing, Movie Pass, etc. These are items that are nice to have, but the world doesn’t stop turning if we go without. It can be helpful to list all expenses (including needs) from most important to least important. Your income for the month goes first towards your needs, and second towards your discretionary expenses.
4.) Planning It Out
At this point, if you’ve looked at your baseline income and subtracted your necessary and discretionary spending, and you are running short, we have an issue. This likely means that some of your expenses are too high. This is where I step on your toes and you get annoyed at me (sorry, not sorry). For example, you need a car to commute to work, however, a car payment of $1,250 a month is not a need, that’s a want! You NEED a reliable car, you might WANT a car with surround sound, leather seats, a built in vacuum, and a full service bar in the back. Most of us want that, but we don’t have to have it in order to get to work without the engine giving out. That being said, keep needs in perspective when it comes to your budget. You need food, you don’t need a triple shot white mocha latte every morning (though I don’t blame you for wanting it).
5.) Good Ole Savings
Savings is always important, but when income is unpredictable, it feels like it matters even more. You’ve probably heard that the recommendation is to have 3-6 months of living expenses saved up. This is an amazing goal, and hopefully we can all reach it one day. There are many ways to save up for this goal. Have a yard sale, cut back on fast food and dining out for a few weeks, monitor your utility usage, etc. The list goes on! The reason emergency savings are so important is because life is unpredictable, for everyone! You will sleep better at night, having an emergency fund available to help cover the unexpected.
What tips do you have for living on a variable income? Any thoughts on making sure your budget is stress free? Let us know in the comments be