Budgeting When Your Income Ebbs and Flows

The foundation of budgeting rests on two main pillars: planning and steady income.

If you’re a freelancer, an artist, or otherwise have an uncertain income, you know both of those can be challenging. Here’s a look at how to establish a budget and stick to it when your income is irregular and uncertain.

Have a baseline
Salaried employees can use their monthly income to determine what they can afford to spend, but freelancers generally have to consider expenditures first and then determine how much work they need to do each month to meet their financial needs. For this reason, it’s smart to keep monthly expenditures stable and predictable. Think about housing, utilities and transportation costs, along with the cost of food, including groceries, restaurant meals and coffee shops.

Track your spending for the past couple of months in several categories to find the average. Don’t forget other living expenses such as medical costs, as well as any auto loans or student loans. Budgeting apps such as Mint or BudgetPulse can help you manage and categorize your spending. Some financial institution provide consumers with customized apps, such as USAgencies Credit Union’s MoneyMark tool for use by members. This app also helps you track your financial assets and net worth.

Get organized
Once you have a clear idea of your monthly expenses, you’re ready to assess a minimum income. If you have a few years of freelancing under your belt, it might be helpful to look back on bank statements to see which months tend to bring lower income and which trend higher so you can plan for periods of feast and famine. For certain months, that might mean planning ahead to pick up extra part-time shifts somewhere to bridge the gap between income and expenses.

Many people with uncertain income are also self-employed, meaning they’re solely responsible for things such as paying income taxes and saving for retirement — hassles that salaried employees don’t always have to worry about. Keeping income organized is imperative.

In addition to personal and business checking accounts, it’s a good idea for freelancers to have at least two separate savings accounts. One should hold money for the quarterly payments you’re required to make to the IRS to cover your income and self-employment taxes. The second should be for your other savings.

Put aside emergency savings
If income is unstable, the best thing you can possibly do for yourself is have at least three months’ worth of living expenses stashed away. That way, if there’s a lull in work, you’ll have enough of a savings cushion to still make ends meet.

Save for your tax payments
Since taxes aren’t automatically deducted from your pay, make sure to send in quarterly payments or April can bring a harsh dose of reality, especially if your tax bill is upwards of a thousand dollars. It’s wise to deduct taxes each month as you go along and place it in a separate account.

Plan for retirement
Since you don’t have the option of a 401(k) plan with an employer match, you must be your own best ally when it comes to funding your future. It’s smart to plan for retirement by setting up an individual retirement account (IRA) to cushion the golden years.

By keeping track of expenditures and having a good backup plan, you’ll be able to stay financially afloat, even in times of instability.

By Cait Klein, NerdWallet

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