Some of you have been asking me how I budget for an irregular income.
I’ve been stumped for answers. Honestly.
To me, it is not really any different than budgeting for a steady income, you just need a different mindset to think that this money is meant to last for triple the time it was earned in.
I think it’s a lot harder for people with jobs like bartending, or waitressing because it relies heavily on tips and it can be the same sort of “feast or famine” mentality.
But I persisted in trying to figure out how I do it, and I came up with my 5 rules of what I’ve been doing lately ever since I quit my cubicle:
- Cut back your basic fixed expenses (Rent, Utilities, Groceries, Medical)
- Budget & check yourself for overspending (Traveling is in here. I do it on the cheap)
- Save as much as you can to live off the savings for a longer time
- Have a chubby emergency fund (Freelancers may go 2 years without working depending on contracts)
- Deflate your head from seeing those large cash flows – it won’t last…guaranteed.
To go into some detail…
Keep your bills low & don’t get swept away by the large amounts of cash at once:
It’s hard not to gawk at your paycheque being $16,000+ at one shot every 2 weeks.
The key is to remember that the money has to last you about 8 months on average. So $16,000 / 8 = $2000/month.
I just remind myself that I’m getting paid ahead of time, and I need to spread out the money over time rather than to get a bloated head about how much cash is being dumped into my accounts.
It’s kind of like getting a tax refund or winning the lottery. You’re so heady with the smell of cash you don’t know what to do.
The best thing to do in any case (lottery winnings, tax refunds and big cheques) is to put it away in savings.
With the money I earned, I cleared the rest of my debt, put away $10,000 into my retirement fund when the getting was still good after the crash in late 2008, and the rest went into an emergency fund.
If you can move to pay less rent, do it.
If you can study your grocery budget and save $25 a month by clipping coupons or visiting different grocery stores, do it.
The lower your expenses, and the higher your savings, the better. And that’s a good rule in general for everyone, not just irregular income earners.
Don’t be a slave to your bills.
Save when the saving is good
In the fat years, sock away as much money as possible to see you through the lean times.
My rule is that I have to have at least 2 years saved in an Emergency Fund (right now I’m at a comfortable $1000 a month, with 2 years saved ($24k).
But if I really stuck to my Basic Budget of $700 a month, it’d be almost 3 years of savings)…
I will be touching that fund next month (September 2009), and I should be good to last until around 2012 with the savings I have.
If need be, I can always pick up more freelancing side projects on the side. In fact, I would almost suggest having two freelancing jobs.
We’ve been travelling too much for me to concentrate on making my side work something steady, and I am concerned about having time to handle two freelancing jobs in case something comes up in the IT world that takes precedent over my other job.
Still, food for thought.
I basically can’t rely on a steady paycheque. I can only rely on having a lot of money at once, and then nothing for a while. And if you aren’t good at spreading out your money and budgeting, this is a good way to learn.
This recession is a good lesson for me to keep in mind for the future. Going a year or two without working is a good way to force me to keep this at the back of my mind each time a cheque rolls in.
Set priorities for bills and expenses, and stick to a general budget
My basic set of bills are: Rent, Food, Utilities, One-Off Medical Expenses. That’s it.
Everything else is extra and unnecessary, including travel.
I know that and my bank account knows that.
I do admit to having gone a bit nuts in the first couple of weeks of getting a huge cheque, such as taking my family out to dinners and whatnot.. but that ended pretty quick.
And with all the travelling I’ve been doing this year.. we’ve done it all on the cheap. About $1000 per city (all included with flight, hotel & fun), and $2000 to go to Europe for 3 weeks (all inclusive).
If our travel budget was “normal”, and cost $5000 each city, I’d only go to ONE city and end it. But since we can make $5000 last for 5 domestic cities, why not? Or 3 domestic cities, 1 international one.. you get the idea.
The main budget for travel was $5000 and how we chose to spend it was up to us.
As with regular budgeting, you have to prioritize.
Medical bills? Yup, that comes first before a new pair of boots.
I discovered many ways to have fun for free, and honestly, blogging has been a great outlet for me to channel my extra energy and time into (sometimes too much energy), and to keep me busy, having fun, and all for free!
As for eating out, we cooked in our hotel rooms when we traveled and we don’t really eat out in our home city.
The food at home is just too good to consider eat out and paying 4 times as much money for something half as good…
Don’t touch your business account:
It’s for business. You still have to pay taxes (19% in my case) and you still need to spend on expenses for when you prospect for contracts.
It may be tempting to say “Look it’s a business account.. surely I can pay a $500 meal out with friends.”
Don’t. Do. It.
It’s a business account, but it’s still YOUR account and your money. You still have to keep some sort of positive balance in there in case the need arises.
Luckily, I am in the service business. That means I don’t carry inventory, I don’t sell goods and I don’t have suppliers.
The only supplier and goods I sell, are my brains & my skills. This makes for budgeting and keeping an account a LOT simpler than if I were to run a small store for example.
If you want a more complicated set of rules where you estimate your future income and then pay yourself a salary every month (I don’t thrive on rules), check out J.D.’s similar principles on budgeting for an irregular income.
It may be a better system for you than my flexible system for dealing with irregular income. Some of the commenters are really good.
What about you, irregular income earners? Any tips you can offer on how you budget?
THREE FB GIVEAWAYS THIS MONTH!
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And I’ll switch into a wrap dress if I have to, for the evening so that I don’t freeze my butt off if it happens to be cold.
