The Best Way to Budget When Your Income Fluctuates
When you’re playing in the gig economy, budgeting can be difficult. However, the budget is the most important for anyone who works with an irregular income. Even if you don’t consider yourself living paycheck to paycheck, it’s hard to create a budget and stick to it when you don’t have a predictable paycheck to base your calculations on. So how do you get started on the perfect budget if your earnings keep fluctuating? Here are our budgeting tips for when your income fluctuates from month to month.
Start tracking your income and expenses
The first step to creating a budget is to get estimates for the numbers you are going to work with. Review your bank statements and calculate income and expenses for six months. From there, you can simply divide the total by six to determine your average monthly income and expenses. However, this average is most useful for people with a stable income stream. Read on to tailor your budget to your income fluctuations.
Estimate your lowest monthly income
Once you have determined your average income and expenses, determine the smallest possible version of your budget. How much do you need to cover your essentials? It’s important to estimate this number conservatively so that you can pay for your needs even in months when you earn much less than your average income. This way you will know how much you need to save to get through the leaner months.
Base your budget on percentages
When the amount you earn changes, it makes no sense to choose an arbitrary number for monthly savings. Instead, determine the percentage of your income that you can afford to save. So the amount you save will fluctuate in proportion to how much you earn.
Create your paycheck
Since no company sets your salary, consider setting one for yourself. Your average monthly spending is a good starting point and you can negotiate with yourself from there.
The pseudo salary comes in handy if you want to try a zero-sum budget . With this budget, your goal is to have your income and expenses exactly match each month (so you don’t have extra dollars left). The important trick here is that you treat your savings as an expense.
For example, let’s say your monthly expenses (rent, groceries, gas, etc.) average $3,000. Let’s say your salary is $3,000. To work with a zero-sum budget, you must make sure you always have $3,000 to cover expenses. So during the months that you make over $3,000, you put the surplus back into your savings. And in those months when you make less than $3,000, you can use your savings to bring your paycheck up to $3,000.
Prioritize your reserve fund
Earlier we have already talked about the importance of creating a reserve fund. The usual guideline for your emergency or rainy day fund is to save enough to cover your expenses for three to six months. However, this rule tends to take on more importance when your source of income is irregular. Don’t stop saving just because you’ve reached that brilliant six-month mark.
An emergency fund is an essential source of security for anyone with a fluctuating income. You never know when you might be stuck in a low income period for longer than expected or lose your source of income altogether. It is important to make sure you have enough funds to cover your essentials in case of unforeseen circumstances.
It can be difficult to budget when your income fluctuates, so give yourself the opportunity to try a few strategies while you figure out what works for you.