Tips For Budgeting On An Inconsistent Income

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Posted on: in [ Budgeting, Financial Education, Personal Finance, Saving Money ]

Tips For Budgeting On An Inconsistent Income

Budgeting with a steady income — like someone would with a typical salaried or full-time job — is a pretty straightforward task. A fixed income matched with fixed expenses is like fitting a round peg into a round hole.

But the task of budgeting gets a little dicier when working with an inconsistent income in a part-time, freelance, business owner or contractual role. Being self-employed and managing your own workload can be exciting, but it obviously brings challenges when it comes to managing income and expenses.

Creating a budget for an inconsistent income is difficult but of the utmost importance. It takes diligence and discipline, which is easier said than done. While the majority of Americans still fit into the steady income pool, there is an increasing number of people dealing with a so-called “flex” income. 

As workers in this generation continue to value freedom in the workplace, many are turning toward self-employment. According to 2016 numbers, there are 15 million self-employed Americans. That number is expect to reach 42 million by 2020, according to FreshBooks’ second-annual self-employment study.

In this blog, we chatted with Nikki Uebel, branch manager at our Jefferson Peoples Bank location. Uebel has extensive experience in money management and gave us some tips on how to manage a so-called “flex budget.”

“It’s exciting in the fact that you can have more control over it,” Uebel said. “Oftentimes, it means that person is working in a business that allows them to have more control over their income. But you have to be very careful and smart about how you plan and spend.”

Budget realistically…  

Trying to guess what the next period’s income looks like is a losing battle. Why not turn to numbers you already have? The best way to predict the future is to look at the past when it comes to these types of budgets.

Examine your previous statements and calculate how much you’ve earned in the past. Then take that number and carry it over to the future budget.

If you’ve just started working with an inconsistent income, live frugally and take a few months to determine what a realistic number from period-to-period.

“Base the numbers off what you’ve made in the past and your goals for the future,” Uebel said. “If there is a reason to believe you’ll have higher sales or a higher income, you can adjust, but usually previous years are a good reflection of what you will be earning.”

…And conservatively

For the conservative part, your budget should include “barebone” expenses. This is just the baseline number of what it’ll cost for you to get through a month or a year. If you’re income is unstable, then your expense should be stable and predictable.

The 50/20/30 rule puts three expenses into percentages of your overall expenses: essentials, priorities and lifestyle, respectively. About 50 percent of your expenses fall into the essentials category, and that’s what your baseline should be — expenses you cannot live without. This includes groceries, rent, utilities, transportation costs, etc. 

Stay disciplined

Perhaps the hardest part of this type of budget is staying disciplined. Sometimes, money can come in bunches, and it can be tempting to spend it all at once. But this can cause issues during those lean periods during the year.

“You have to be a lot more disciplined about creating the budget, staying on track with it and maintaining your goals,” Uebel said. “You also have to be open to changing it if you need to. Don’t spend all the money when you have it, and make sure the money can last you an entire season of expenses.”

Staying disciplined is an important tip for any type of budgeting, but it’s even more important when income ebbs and flows.

“If you get the bulk of your income during one time of the year, make the payments you can,” Uebel said. “Then, if you have anything left over, move a portion of that money into a savings account to help fund those expenses throughout the remainder of the year.”

Save for the future

Taking the above point on budgeting conservatively does leave some room for extra money, if you earn more than what you planned for.

Having a surplus of money can be beneficial, but continue to be diligent in your planning. Because the income may not be the same for the next budgeting period, Uebel recommends saving that money in case it needs to be used at a later time.

Simply put: Resist the urge to spurge unless you are sure the money won’t be needed in the future. Even then, putting the money away may be the best move.

“If you do have a surplus of income, that’s great,” Uebel said. “Take that money and put it toward something in the future. Don’t just spend it right away. That allows you to use the surplus income on something big in the future or roll it into the budget for the next period.”

An important thing to keep in mind if you’re in a flex income situation is tax season. Making your income allows you to reap the benefits, but it also comes with some unique costs. There are special tax rates for those who are self-employed, and they can be hefty depending on how much money you bring in.

And since those taxes aren’t taken out every pay period like a traditional paycheck, the Internal Revenue Service foots you the bill during tax season. This makes saving money even more important, to cover tough-to-predict tax costs.

 “I’d recommend working with a banker or tax preparer to iron out the expense,” Uebel said. “Do that before you can really start to feel like you can spend the discretionary income.”

A flex income offers a lot of risk but a lot of reward. Following the above guidelines can help you reap the rewards in a responsible and hopefully lucrative fashion.