Budgeting with Inconsistent Income
If you’re a business owner or freelancer, you know what it’s like to have inconsistent income.
Many times, it’s through no fault of your own! Business tends to have peak seasons, and depending on the industry you’re in, the financial difference between seasons can be dramatic.
When you have an inconsistent income, budgeting can be tricky. However, budgeting is a critical component to meeting your financial goals. Don’t let the anxiety you feel around budgeting deter you from addressing it. Luckily, there’s an easy system to follow that makes budgeting with irregular paychecks a snap.
This is probably the easiest step in your budgeting plan. Estimating your expenses is an ideal way to set a baseline for your budget. Start with the basics - food, shelter, utilities, and transportation costs. You should also lump any mandatory debt payments you make each month and any contributions you’ve been making to a retirement fund.
Next, add expenses that fall into the gray-area category between “want” and “need.” This might include cable, a Netflix subscription, or a gym membership. These expenses might not be completely necessary, but if you wouldn’t want to cut them from your day-to-day, go ahead and include them here.
Take a Look at Your Income
Business owners and freelancers may face a more complicated task when it comes to budgeting with an inconsistent income. To set a realistic budget for yourself, you’ll need to understand how much money you can expect to be coming in.
If you’ve only been in business for a short period of time, you might not have as much data to work with. But if you’ve been in business for at least a year, it’s good to take a look at your monthly profit and loss reports for the last 12 months. If your income is somewhat consistent across the board - that’s great! More than likely, though, you’ll see some ups and downs across different seasons.
Take the income from the month with the lowest profit. This is the income estimate you’re going to build your budget around. If the lowest-profit month in your profit and loss reports doesn’t reflect all of the consistent, recurring income you’re expecting in months to come - go ahead and add it in to your income estimate.
Build the Budget
Now that you have your income and expenses estimated, you can start to build your budget. Subtract your estimated expenses from the income estimate you created. If your total is negative, it’s time to start cutting some of your less-than-necessary expenses. You can also work to reduce your existing expenses by taking a few moments to call providers, cancel old subscriptions, or have a “no shopping” month. Even saving a few extra dollars here and there can help.
If you subtract your expenses from your estimated income and you come up with a positive number - that’s great! But it may be a little less than you had hoped because we used your lowest-income month as a baseline for the budget. This ensures that no matter what your income is, you’ll always be able to cover the bare minimum expenses.
Prioritize Debt Repayment and Saving
Whether you need to limit “extra” expenses, or you just need to refocus some of your income coming in, it’s important to prioritize debt repayment and saving. Building an emergency savings can help you bridge the gap in case your income takes an unexpected dip below your estimated monthly income, or if the unthinkable happens and you’re saddled with a huge expense - like a hospital bill or needing to buy a new car after an accident.
Debt repayment will also be a critical component to your budget. Being in debt as a business owner can ultimately hinder your profits and business growth. Plus, the money you’re spending each month on debt repayment hurts your ability to build a savings, reinvest in your business, or save towards a goal such as buying a house or travelling.
Typically, it’s recommended that you put 30% of your total income toward debt repayment and 20% of your income toward savings - and 50% toward everything else. Financial planners can help by working with you to adjust your budget and ensure all of these spending and saving categories are met.
What to Do With Extra Income
You’ve created your budget based on your lowest possible estimated income. That means that sometimes (hopefully often!) your income will actually be higher than you’ve estimated. This leads to the question: what are you supposed to do with the extra?
You have several options. You can use the extra income that comes in to build your cash savings, contribute extra to your retirement fund, or make additional payments toward your debt. Alternatively, you can use the extra income to start saving toward your goals - whatever they may be.
When in Doubt, Ask For Help
As someone who is self-employed, I understand that making time to work on your budget or personal finances might fall to the back burner. You have a million things on your plate already and sitting down to get your finances organized doesn’t sound like a fun and exciting way to spend a Saturday.
That’s why speaking to a CERTIFIED FINANCIAL PLANNER™ can be helpful. Working with a professional to get ahead on your personal finances is an excellent way to work toward your goals, grow wealth, and build the life you want. If you’d like help setting up a budget based on your inconsistent income, please contact me today. I’d love to chat with you about how we can make your money work for you!