Increasingly today there are many Americans that are self-employed or earning side income in addition to a regular job to make ends meet. In fact, the number of self-employed Americans has gone up year after year, with 15 million Americans listed as self-employed in 2015, according to the U.S. Bureau of Labor Statistics.
Self-employment often can mean a variable monthly income where income comes in at different times of the month and in varying amounts. Budgeting with a variable income can be challenging at times. However, you can plan for it with some proactive thinking ahead.
1. Start With a Budget in Mind
Look at your income in the last year. Create a list of all your expenses, starting with repeating monthly bills such as your mortgage or rent, insurance (health, home, renter's, car and any other), utilities, loans, credit card bills, car payments, food and retirement savings. You may find writing out your expenses manually is the best way. Other options include entering your expenses in a free financial planning app like Mint.com.
Make two columns where you have the listed expense based on your statement and then the amount you want to allocate for it. For example, if you are running late on a utility bill and had a late fee attached, your immediate payment may be higher, but on a regular basis it could be $50 less. Next, take a look at your annual expenses. What are some of the expenses you have every year besides your monthly bills? Finally, look at additional expenses you may incur such as travel, entertainment, clothing, shopping or other things you purchase. Consider any emergency expenses you may have had previously that you did not plan for or expect. Think about savings buffers you will need. Write down every expense you can think of so you have a full picture of your actual expenditures every month and over the year. This will help you define what your real budget needs to look like, how much you need to earn and what money you have left over for your savings.
Now, taking a look at your list of expenses, prioritize them. What’s essential and must be paid immediately? What’s desirable but not required? Put dates beside your expenses. Put "urgent" at the top, followed by "important," and "desired but not required" at the bottom. Now look at your list again. You should be able to see what is truly relevant and what expenses can wait. This will help you identify what your bare-bones budget looks like and how much room you have in your budget every month for any additional expenses.
3. Pay by Priority
As you receive income, make payments going down your list by priority, covering your rent or mortgage followed by food, transportation, insurance and any other immediate expenses. If you are unable to cover all your expenses, that is OK. When your next payment comes, continue down your list to the next item to be paid. After you have met all your expenses, if you find that you have extra cash left over, you are free to use that money in any number of ways, including saving cash, paying down debt or buying something you want.
4. Review Periodically
Your income may change dramatically over the course of the year. Perhaps your work is seasonal with very busy periods and quieter times. Plan accordingly. For example, if you are earning twice your monthly income during the summer but are finding the winter period very slow, you will want to be sure to put aside some money during the summer months to cover the slower period. There may still be times where you find yourself short on cash or with a list of payments left to finish over at the end of the month. However, by being organized about it, you will find the process less stressful and much easier to manage.