What do salespeople, the self-employed and freelancers all have in common? They are constantly struggling to budget their unpredictable and fluctuating incomes. Imagine budgeting on an amount you do not know until the end of the month, when you will be paid and not knowing how much you will make the next month.
Crazy as it sounds, this is the life for many people who work for commission or are self-employed. However, there are tricks to managing this madness that can help eliminate the sting from the slow months, while making way for better money management. Here are the tips you should follow as you budget your family’s expenditure on a fluctuating income.
Know the Bare Minimum
First, before you even start creating a budget, you have to find out your bare-bones budget. The most critical thing here, is knowing the bare minimum expenses that you have to cover to make it through the month. For many people, bare-minimum expenses include mortgage or rent, transportation, groceries, childcare and utility bills.
Figure Out Your Discretionary Monthly Expenses
After the bare-bones budget, you need to create a list covering everything else in your expenses. The discretionary list may include things like cable television bills, cash you spend on hobbies, money you splurge on entertainment as well as cash for dining out. If you are struggling to create this list, it’s time to take a more painful step; look at the expenses over the last few months of your credit card bills and bank statements.
Build an Emergency Fund
If you have some savings, you are steps ahead. Experts suggest that retaining three to six months of your expenses in your savings account will work. However, building such a war chest when you have nothing to start with can be difficult.
Instead, create a plan that includes automatically diverting a certain percentage of your paycheck each month or week. You can also sell stuff you no longer use or need and allocate the “found money” into a savings account.
Spend Last Month’s Income
Once you have added up your bare-bones budget to your discretionary spending, you have a firm idea of how much money you need to make through a month without the temptation to dip your hands into the savings account. Therefore, on the first of the coming month, deposit that exact amount into your regular checking account. From there, you can deposit all the other money into a short or long-term savings account.
This is called living on last month’s income and is commonly referred to as a zero-sum budget. The main idea here is that you are living off the money you actually made last month – not some projection or a dream.
Get a Salary
Remember how you were depositing the money you need to live into your regular checking account every first of the month? You are now awarding yourself a salary, already an amazing thing is happening when you start thinking about it. While you were once struggling with an unstable income, you can now afford to pay yourself a steady salary, every month!
Know When to Call in a Professional
In some cases, it does help to work with a professional. Some freelancers work with Certified Public Accountants (CPAs) to manage taxes and Certified Financial Planners (CFPs) to help with money management issues. However, if you are in serious trouble with credit, you may consult professionals like credit repair lawyers.
Thanks to a zero-sum budget, you will have to look at your spending critically and pay for savings and investments like ordinary bills. In addition, when you want to make more, simply tighten your belt and look for the expenses you can cut out of the spending plan you created earlier.