In today’s “gig economy”, it is becoming increasingly more common to have income streams from a variety of sources. So…how can you establish and maintain a budget when you’re constantly struggling with inconsistent and irregular income?
Below, we outline helpful tips you can use to get your budget in order so that you can manage those finances without unnecessary worry or stress.
Tip #1: Start with your goals
Identify those short, medium, and long-term goals you have for your life: personally and financially. Make a list of them and place them in a prominent location where you’ll consistently see them. When you know your goals and have a reason for your actions, it is likely that you’ll find yourself more willing to stick with the budgeting process.
Some examples of goals you may want to consider:
- Opening up a Roth IRA or separate retirement account
- Contributing an additional $500 to your emergency fund
- Increasing your credit score by 25-50 points
- Increasing your contribution to your retirement accounts
- Saving for a down payment
- Setting aside money for your next trip
- Paying down your debt
Tip #2: Quantify your fixed costs for the “necessary stuff”
Gather up your financial statements (from credit cards, your bank accounts, your receipts, your contracts, etc.) from the past 2-3 months and begin listing your monthly fixed costs for the “necessary” expenses in your life. Using your statements, calculate the average amount you’re required to pay or spend on those necessary expenses. What exactly do we mean by “necessary things”? Essentially, these include everything you simply can’t do without: your mortgage/rent, groceries, utilities, recurring fixed expenses, debt payments, student loan obligations, self-employment taxes, etc. Note, while social events, travel, dining out, and other expenses are certainly enjoyable and important, they are not considered necessary to your survival.
Once you’ve listed all of your fixed expenses, add in your financial goals. For instance, if you’re looking to save for a down payment or contribute to your retirement account, build this expense in with the rest of your fixed costs. This way, you’ll make sure to prioritize these goals each month because they’re already a built-in part of your budget.
Tip #3: List the remainder of your expenses
Using the same financial statements you used earlier to calculate your fixed expenses, this time make a list of your remaining costs. These expenses are the ones that are hardest to give up, certainly, but are not critical to your survival.
Tip #4: Quantify your income
Gather up your pay stubs, income statements, or other documents and attempt to understand your monthly income from the previous 6-12 months. Sure, your income may have fluctuated each month, but looking back at the last year can give you a starting point to determine a monthly average income total. Aim to take an average of your lowest earning months to give you an idea of what you absolutely need to plan for going forward.
For example, if your earnings during your lowest points in the last year amounted to an average of $3,500/month, be sure to base your spending and budget on this income total. Resist the urge to plan your budget on a higher, unrealistic income figure.
Using this new income figure, begin to understand which of your expenses can be covered given this amount. For instance, if your average income is $3,500/month and your fixed expenses amount to $2,900 then you have approximately $600 left over each month to use to support your other lifestyle needs. Note, if your expenses surpass your income total for the month, it may be time to consider making a few tweaks or eliminating some expenses in order to live within your means.
Tip #5: Pay yourself this monthly income total each month from your savings account
Each month, elect to have your total income deposited into one savings account. Then, transfer your exact monthly income amount that you calculated in Tip 4 above to your checking account so that you can cover all of your monthly expenses. Since you’ve already built your budget based on your realistic income, transferring that amount to your checking account each month will allow you to cover all of your required expenses and meet your savings goals, as well.
Here’s an example: if you make $4,200 in one month, deposit all of that income into your savings account to start. Then, transfer the low-end of your average monthly income (that you calculated earlier) into your checking account to cover your fixed costs and savings goals. If we continue with the example figure we previously calculated, this would mean that $3,500 of your income would be transferred each month into your checking account.
Doing this exercise will ensure that you continue to live within your means and will also give you the ability to save any surplus income you earn over the year (which gives you more flexibility and cushion for those tougher times). Paying yourself a consistent amount each month allows you to actually follow and stick with a budget and continue to prioritize building up your emergency reserves.
It is important to note that diligently adhering to a budget and/or prioritizing your financial goals is no easy feat no matter how much you earn or how frequently you are paid. Budgeting takes hard work, determination, and having a dedicated plan in place to be successful. Get started today – you’ve got this!
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