Nearly a quarter of Americans have no emergency savings, reports MarketWatch. Many of them would have to take out a loan, borrow money, or sell their belongings to cover financial emergencies.
Being employed no longer guarantees financial security. In these uncertain times, you could lose your job in the blink of an eye. Millions of people lost their jobs or had their working hours reduced in 2020 due to the novel coronavirus crisis.
Things are not easier for the self-employed, either. Freelancers often find themselves in a situation of financial distress due to fluctuating incomes. As a solopreneur, you may lose clients or incur unexpected expenses at any given time. Meanwhile, the bills keep rolling in.
While you can’t always control when you get paid, there are ways to take the sting out of the low months. Use these simple strategies for budgeting on a fluctuating income without giving up comfort.
1. Start with a Financial Checkup
Are you in a profession where your income fluctuates throughout the year? Are you a freelancer or someone trying to build a side hustle? Or maybe you have a seasonal job? In either case, an irregular income can make it difficult to plan for the future.
When you have a fluctuating income, your wages or earnings may change from month to month. Freelancers are not the only ones who find themselves in this situation.
Temp workers, real estate agents, home care providers, and sales reps have the same problem. Small business owners and startup founders are no exception. Their income is irregular, making it hard to know when to spend and when to save.
If you fall into any of these categories, it’s important to assess your finances and make a budget. This means you need to know how much money you have in your checking and savings accounts, what you owe in taxes, and what you spend each month. You may also want to estimate your income over the next months and build an emergency fund.
First things first, gather all financial information and write everything down. Next, take these steps to evaluate your financial health:
- Determine your monthly income over the past year. Identify the best and worst months.
- Set financial goals for the next 12 months. Consider any changes that may affect your income and ability to work.
- See what you have in your checking, savings, and retirement accounts.
- Request a credit report and use this data to build or improve your credit score.
- Try to figure out where your money is going. Make a list of essential and non-essential expenses.
Consider using budgeting tools like Mint, Kubera, or Personal Capital to get a better picture of your financial health. With this information, you’ll be better able to manage your money and avoid financial mishaps.
2. Set Aside Money for Taxes
One of the best things you can do is to set aside money for taxes as soon as you get paid. The exact amount depends on the tax bracket you’re in. Small business owners may also need to pay sales tax, employment tax, excise taxes, and more.
If you’re a freelancer, set aside a portion of your earnings for taxes. Use Form 1040-ES to estimate what you owe to the IRS.
Consider setting up a savings account for tax payments. Link it to the checking account where you deposit your earnings. Transfer money from your checking account to your savings account every month or each time you get paid by a client.
3. Know Where Your Money Is Going
Every penny matters when you have a variable income. That’s why it’s important to know where your money is going and then take the steps needed to cut back on spending.
Start by checking your bank account statements and cash receipts for the current month or past months. Use Microsoft Word or a piece of paper to divide your spending into two categories: fixed or essential expenses and discretionary expenses.
Identify Essential Expenses
Mortgage payments, rent, food, utility bills, and car insurance are all examples of essential expenses. Your list may also include the following:
- Medical expenses
- Property tax
- Renters or homeowners insurance
- Life insurance
- Health insurance
- Public transportation
- Toiletries
- Cleaning supplies
- Clothing
- Car payments
- Child care
- Pet food
- Gym membership
Look at each item on your list and ask yourself if you can live without it. Think about some free or low-cost alternatives to the products or services you need.
For example, someone who goes to the gym by bus can cut costs simply by taking the bike. If the gym is miles away from your home, look for a fitness center in your area. This would allow you to walk to your destination instead of driving or using public transport.
Some expenses, such as groceries and utilities, may vary from one month to the next. Try to see where you can cut back and still live comfortably. Small changes, such as buying food in bulk and switching to generic brands, could save you hundreds of dollars a month.
Cut Down Discretionary Spending
Non-essential expenses, or discretionary spending, can add up in the long run. These may include things like:
- Home decor
- Subscription services
- Pre-packaged snacks, lattes, or soft drinks
- Magazines
- Bottled water
- Dining out
- Traveling
Millennials spend over $838 on unnecessary products or services each month, according to a 2019 survey. The same source reports that baby boomers spend nearly $700 per month on non-essentials, while Gen Xers spend close to $600. If you have an irregular income, reckless spending can drain your budget and get you in debt quickly.
Seek ways to cut down discretionary spending—at least for a while. Most importantly, don’t borrow money for non-essential expenses, such as a last-minute vacation deal. This will allow you to build up your savings and budget more effectively.
For instance, you can start by canceling recurring app purchases and magazine subscriptions. Get a water filter jug so you can stop paying for bottled water. Make your own snacks instead of buying potato chips, trail mixes, and other treats. Think twice before buying an extra pair of shoes or a new jacket.
To keep things simple, follow the 50/20/30 rule. Spend up to 50% of your after-tax income on essential products and services and 30% on non-essentials. Use the remaining 20% to pay off your debts, make retirement contributions, or build an emergency fund.
4. Create a Cash Buffer
When your income fluctuates, it’s important to have a cash buffer for emergencies and low-income months. This way, you don’t have to borrow money or take a loan to cover your expenses.
Ideally, try to put aside at least 10% of your annual income. Another option is to save enough money to cover your expenses for three to six months. Calculate your after-tax income over the last year, divide the result by 12, and then use this as a base mark.
Depending on your needs, you can build an emergency fund, a cash buffer, or both. Think of your cash buffer as a financial cushion for when business is slow. An emergency fund, on the other hand, should cover unexpected costs, such as emergency car repairs or medical bills.
Allocate funds to your emergency fund and cash buffer each month. If your income goes up, increase the amount deposited into these accounts.
Dave Ramsey also recommends starting a sinking fund. This savings strategy involves setting money aside for a specific goal, such as the purchase of a new car or house.
When you have a sinking fund, you don’t need to tap your emergency fund or take out a loan to cover larger expenses. You can even set up multiple funds for home repairs, traveling, holiday spending, or gifts.
5. Focus on Growing Your Income
Making savings and cutting back on expenses can help you avoid financial mishaps, but it’s just a temporary solution. While it’s possible to live comfortably on a fluctuating income, you must also focus on bringing in more money. This will allow you to keep up with your expenses and afford the things you want.
More than 57 million Americans freelanced in 2019. This number increased over the last two years due to the COVID-19 situation. With the advent of digital technology, anyone can start a side hustle and make extra money. If you’re already freelancing, seek new ways to monetize your skills.
If, say, you’re a content writer, consider publishing an eBook or online courses to generate passive income. Depending on your expertise, you could also offer consulting services to aspiring writers and bloggers. Another option is to increase your rates and sell retainer packages.
Someone with a background in management, sales, or accounting could break into consulting. If you’re a photographer, consider selling your work on stock photography sites or offering online photography classes.
Here are options you might be interested in:
- Become a wellness coach
- Offer fitness classes online
- Teach English as a second language
- Get a delivery gig
- Rent out your car
- Sell custom T-shirts via Teespring and other platforms
- Write and sell eBooks on Amazon
- Start a blog and sell advertising space
- Become a virtual assistant
- Set up and monetize a YouTube channel
- Start a dropshipping business
- Build a membership website
Once you have made a decision, research similar businesses and try to come up with something better. Explore your options, brainstorm ideas, and take one step at a time. Don’t just jump into it.
Start Planning for the Future
Now that you know how to budget on a fluctuating income, it’s time to make a plan. Think long-term rather than focusing on your immediate needs. Set small financial goals in the first few months and aim for more as you get better at managing your money.
The key to making it work is to ditch the all-or-nothing mindset. When you’re a freelancer or startup founder, it’s perfectly normal to have a variable income. Be realistic about what you can afford and take small steps toward a better future.
Author Bio: Andra Picincu is a digital marketing consultant and copywriter with over 12 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Visit her LinkedIn profile to find out more!
