Successful budgeting tends to depend on two things: careful planning and a steady income. The first, anyone can do. The second may not be so simple.
If you’re self-employed, you might be asking yourself, “But I don’t have a regular paycheck coming in — can I even set up a budget? Should I bother?”
You can. And, yes, you definitely should.
A budget is simply a way of figuring out how much money you need to go about your daily life, and arranging things so that you don’t exceed that number. Whether you track every penny and every expense, or just keep on eye on a few problem areas, a budget helps you succeed financially.
Budgeting when your income isn’t predictable can be tough. But, actually, it’s especially important if you have an irregular income. Who might have an irregular income? If you fit into one of these categories, I’m talking to you:
- temp workers,
- permanent employees with fluctuating hours,
- commissioned salespeople,
- those doing seasonal work,
- people will tip-dependent income,
- owners of a small or startup business,
- on-call employees,
- or simply odd-jobbers.
If any of the above apply, this article is for you. Keeping track of your incoming funds and knowing where your money then goes are incredibly important to maintaining financial security when you don’t get a predictable paycheck from your 9-to-5. Below is one three-step method to creating a budget when your income isn’t predictable.
Step One: Know Your Baseline
When you have a steady paycheck and a predictable income, can make a zero-based budget by allocating spending categories within that predictable limit. But those with unpredictable incomes must work backward — starting with the amount of money you’ll spend, in order to figure out how much you need. If your income is unstable, then it is your expenditures that must be stable, predictable, and repeatable. According to the 50/20/30 rule, there are three categories of expenditures: Essentials, Priorities, and Lifestyle.
Your baseline expenditures are those in the Essentials category — those that must be paid every month, without which you can’t live. Of these, the first costs you’ll want to estimate are:
For your baseline, include the lowest food cost that is reasonable for your circumstances. Plan your grocery expenditures without any extras, like restaurants, coffee shops (unless you must use them to have business meetings or to avoid paying for internet at home), wine, or fast-food pit stops. If you’ll be couponing and cutting back your food costs, take that into account. However, if you know you won’t actually clip a single square, be realistic about your cost estimates. One of the best ways to get an estimate is to track your spending for a few weeks to get an idea of how much you spend.
2. Housing and utilities
For almost everyone, essential expenses include rent or mortgage. If you’re responsible for either — even if you house-share, live rent-free, or have a sliding rent arrangement — include your minimum monthly housing cost in your baseline. Make sure to include the monthly amount for homeowner’s or renter’s insurance and property tax bills in your total.
If you live in a geographic region in which heating or air conditioning is essential, include these average monthly bills in your baseline. In moderate regions, utility costs are a lifestyle choice. But heat isn’t optional in January in Vermont!
The same goes for internet and phone costs. If you work from home, they’re most likely a necessity and should be included in your housing and utility estimate.
3. Medical costs
A note about health insurance: The
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