The way people work is changing. Not only are people working for longer, retiring later they are also more flexible in how they work, many being defined as self-employed. Regular weekly paychecks are not always guaranteed in modern work and the challenges of irregular income are faced by more and more people as the number of self-employed increases.
Budgeting while being self-employed is a constant challenge as you don’t know what will be in your account next month, what you will earn and what bills you will have to pay. Some weeks you will be comfortable and the next month you will be scratching your head wondering why you have no money to pay your bills. Facing the challenges of having a variable income is common yet there is little advice out there about how self-employed people can improve their financial stability.
These are the tips I have come across that help variable income earners better manage their money. Although there is no quick fix for variable income, the following will help with the uncertainty and volatility it presents.
Allowing for unreliable clients
If you are an independent worker, listing out the income based on your project timeline over the foreseeable months will improve the organisation and management of your finances. If like many freelancers you are uncertain if a client is going to pay you on time or if you suspect there may be an issue. Take this into account in the budget by reducing the amount of income from clients who have the potential to be unreliable. Reducing this expected pay by 50% is usually a good idea. It accounts for the unreliability. When you are waiting on payment from clients it can significantly burn through your cash flow so it is always important to take this into account and not be relying on money you may not get.
Giving yourself a wage
Many fall into the trap of spending what they have or enjoying their income on a good month because they have worked so hard to receive it. It’s important to be disciplined with this tip. Allotting yourself a monthly salary that takes into account your average monthly pay. This will not only help you with saving but it will give you more financial stability. Knowing what you will have to spend every week will help significantly with budgeting as you have gone from having a variable income to having a weekly paycheck.
It is very easy to increase your estimated spending through impulse purchases and unplanned spending, when you are on the same weekly paycheck you find out quickly what you are able to afford and when you can spend on one-off items.
You can do this by increasing either using a pen and paper, excel sheet or software. Whatever works for you. Sometimes I think it is as easy to just write it out on a sheet of paper.
Making a zero-sum budget is simple and requires you to do only two things.
- hold back a specific amount of money that will allow you to pay for bills and unplanned spending.
- A plan outlining your planned spending including all of your bills and spending.
The idea is to become rigorous about what you are spending and know exactly what you have at your disposal to spend. Zero-sum budgeting will help you attain a good system and you will not spend money you don’t have to spend.
Take into account one-off bills
Such is the nature of one-off bills, it means that we can often be caught by surprise when we have to pay for them. Leaving us short to pay for the essentials. Whether something in the house needs fixing or if you have car trouble you can’t predict it but you can plan for it and be ready when it happens. The following method will help you when trying to tackle one-off bills.
Open an additional savings account to cover irregular expenses, this will act as an account to cover one-off bills that are not planned and will give you extra insurance knowing that it is there to use if something unexpected happens. This will take a number of months to build up so it is important to be patient and stick with it.
Reexamine bank statements and receipts
Reviewing what you have spent over the last three months can be quite insightful. It can show you some interesting patterns you would have never thought would have such an impact on your pocket. I discovered subscriptions I had long forgotten about that were costing me a considerable amount each month. You will be able to get a better sense of where your high-cost items are and where you can prioritize. It’s a great feeling cleaning out any unnecessary spending from your life, this will give you clarity and help you be more financially aware of what you are spending and what your needs are.
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