How do you structure your budget if your income is unpredictable?
Internet-ready mobile devices have allowed many of the jobs traditionally held in office cubicles to be done on the go. Jobs like web development, content marketing, teaching, and research and language services are now easily outsourced to different talents across the globe.
The ease of working on your own time, at your own pace has appealed to many, as statistics on freelancing show. Today, freelancers make up 35 percent of the US labor force, collectively earning a staggering trillion in just the past year.
How is this work status affecting a freelancer’s financial stability?
While the margin for earnings is huge in a work with no predefined figures, most budget models rely on a fixed regular income stream.
So how do you, as a freelancer, handle a tricky financial position with fluctuating income?
While this setup can indeed be challenging, properly managing one’s finances is certainly doable. Here are some tips you can follow:
Determine Your Variables
What is X and how does it change depending on Y?
First things first, determine your average monthly income. A good way to do this is to sum up and get the median income from your last 12 months of work. If you think the resulting figure is biased due to a few months of very high payments, you can instead opt to select the lowest income earned in the year and use it as your base.
Now, you have an estimated monthly income.
Step two is tracking down your expenses month per month and determining which ones are necessities and which ones can be cut back or eliminated from the picture entirely.
These priorities may include your mortgage payments, your food allowance, transportation, insurance, health, and family expenses. You also have to factor in annual expenses such as tax payments so by the end of the tax year, you don’t have to come up with a lump sum and defy your budgeting entirely just to make way for a big one-time obligation.
Before building your priority expenses into your monthly budget, you must first earn some level of income regularity, especially if you’ve always had a fluctuating income. If this is your first time freelancing and getting variable salary every month, it’s wise to pay off your debts first than integrating them into your monthly budget head-on. The goal is to have the least recurring expense so you can maximize your earnings.
Need financing for an emergency? Let us help.Build Your Buffers
Since work and income are flexible factors, there is a real possibility that you may end up cash-strapped on certain months when earnings fail to meet your expense priorities.
To prevent the nightmare of having nowhere to turn to when your finances get tight, a good plan B is to establish buffers.
First, you need to have one ready to cover for income gaps on certain months. You should not look at this fund as another form of income. It should only cover the minimal gaps that you need to meet your budget.
On the other hand, you also need to set up an emergency fund. This would cover emergency medical expenses, household repair, unexpected travel expenses, etc.
It is important that you keep these buffers separate.
Get today’s loan rates!Save, save, save
Given that you are betting against certainty, it becomes more and more important for any freelancer or small-time entrepreneur to build up a strong savings account. Start early. Set your goals and make sure you stick to them. Make your savings contribution a significant element of your monthly budget structure. Some financial experts would even tell you to take out the savings part of your income first before you break it down to the expenses. Still, be realistic. What’s more important is keeping it consistent.
Organize
Organize to the point of certainty. It’s the one thing that could balance out the uncertain element of your job or business. If possible, make a separate account where you receive your income and a separate one for your monthly budget. When income is high, don’t take advantage of the extra dollars. Use it to boost your savings or your retirement accounts. You may also use it to max your buffers and achieve peace of mind knowing that you are adequately covered when the need arises.
Discipline is key when it comes to achieving financial health, regardless of whether you receive a steady amount of salary or not.
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