- I’ve worked a salaried job my entire life, but now I’m self-employed.
- Self-employment definitely has its perks, but budgeting with an inconsistent income can be tough.
- Finding my income baseline and building my budget around it has helped me minimise stress and continue working towards my financial goals.
From a lifestyle perspective, the move couldn’t be more satisfying. I absolutely love the personal freedom that comes with being self-employed.
But from a personal finance perspective, self-employment can be more difficult to navigate. For the first time in my life I don’t have a consistent weekly salary.
How do you budget for your expenses in a given month when you don’t know how much money you’re going to be bringing in?
Budgeting simply is more complicated when you have an inconsistent income. And this isn’t just an issue for self-employed people like myself. There are countless employees with commission-based jobs whose incomes can vary widely from month to month.
And while I certainly don’t claim to be an expert in this area, here are some of the strategies that are helping me budget despite my inconsistent income.
First, I’ve found my income baseline
My first budgeting goal now that I have an inconsistent income has been to find an income baseline.
By an income baseline, I’m referring to an amount of money that I can reasonably expect to bring in on any given month.
How do you determine your income baseline? Some budget experts would recommend that you take the average of your last 12 months (or however many months you’ve been working at your job).
That’s not a bad strategy. But I’m a bit more conservative so I prefer a different method. I want to use my worst month over the past year as my income baseline.
Now, since I’ve only been working full-time for a little less than two months, guess what my worst month was? Last month.
So until I get more data to base my budget on, I could still have months where I bring in less than my baseline.
But the hope is that as my business grows, using my worst income month from the past 12 months will be a very safe income baseline.
I prefer the “worst income month from the past year” over the “average income” strategy for one simple reason. Unless the “sky falls,” I should bring in more than my baseline nearly every month.
That personally makes me feel way more comfortable than the idea that six months out of the year my actual income may not reach my baseline.
I’m building my budget around my income baseline
Now that I’ve discovered my income baseline, that’s the number that I plug into the income side of my budget. And as I’m building my budget, my expenses simply have to equal less than my income baseline. Period.
Am I saying that it’s easy to make this work? No.
To be completely honest, it takes a lot of discipline to stay underneath the budget that we’ve set in certain categories …. especially groceries!
And would I much rather plug in what I think I’m going to bring in this month into my budget rather than my income baseline? Absolutely. But I also love the security of knowing that if I stick to the budget that we’ve set, the odds are high that the numbers will always add up at the end of the month. And most months, we’ll have money left over.
That’s where the final step comes into play.
I’m creating savings goals for when my income exceeds the baseline
Since I plan to use my worst income month from the past year as my income baseline, I realise that most months I’m going to bring in more income than I budgeted for.
And if you adopt a similar strategy, you’ll often find yourself in the same situation. What should you do with the extra funds?
First, I would recommend allocating a percentage of that extra money each month to go to savings.
To be clear, I’m not talking about normal saving and investing for retirement here. If at all possible, this should be included in your regular monthly budget.
But in the months that you have money left over, why not give your savings rate a boost?
For myself, I hope to put 20% of my “extra” money away. So if I bring in a $US1,000 more than my baseline this month, I plan to put $US200 of it away in a high-yield savings account or my Charles Schwab Roth IRA.
But what will I do with the other $US800? My wife and I have a “wish list” of things that we’d like to save for over time. The types of things that are on our list?
- Home improvement projects
- Entertainment (concerts, shows, sports events, amusement park tickets)
I look forward to being able to check off one item at a time on our “wish list” during months that my income exceeds my baseline.
This is just what our list looks like. But your “wish list” may look completely different.
And if you haven’t built up at least a six-month emergency fund yet, this needs to be the first goal on your list. Emergency funds are even more valuable (both financially and emotionally) when you are dealing with an inconsistent income.
If this works, I should be getting a ‘bonus’
By using these strategies, I hope to turn the inconsistent income budget problem completely on its head. Instead of my inconsistent income being a constant source of stress, I hope to end most months feeling like I received an end-of-the-month “bonus.”
And that makes me want to actually look at my budget instead of avoiding it like the plague. A budget that you’ll actually use is always the best kind.
If your inconsistent income has made budgeting a consistent headache, you may want to give these ideas a shot, too.
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