BUDGETING ON AN UNPREDICTABLE INCOME
BUDGETING ON AN UNPREDICTABLE INCOME
It’s easy to assume that college students and working parents with side jobs are the only ones that have to think about living on unpredictable incomes, but this is not true. Many fields have inconsistent income (e.g. construction workers, consultants, commission-based workers including salespeople, technicians, etc.). Their income is dependent on demand which fluctuates constantly. Even some permanent workers have fluctuating hours and can find themselves in this situation.
IS IT HARD TO BUDGET/PLAN ON AN UNPREDICTABLE INCOME?
Yes, it is. When you sit down to create a budget you need to have an income to work with. Without having a number to work with, it becomes difficult to create a functional budget. The stress of not knowing how much is coming in at the end of the month can be taxing, especially when you’re trying to arrange a monthly budget. I have made some errors when it comes to planning my budget, but through trial and error, I have found a way to ensure some form of stability in my budget.
PLAY IT SAFE
An important to remember when living on an unpredictable budget is to play it safe. If you’re budgeting on an inconsistent income, then you want to avoid things getting out of control. Give yourself a little bit of a cushion in your budgeting and make things a little safe for yourself, just in case things go bad in reality.
WHAT’S YOUR NUMBER?
This is going to essentially be your break-even-point, the amount of money you must have to pay rent, bills, insurance, etc.
This number should be the very least amount of money you can survive off of in one month; please note this is considering a monthly budget and should be adjusted if you budget by a quarter. This number may be different from your regular budget, for example, I have $150 budgeted for transportation each month and $200 budgeted for food each month but in my survival number calculations, I have only included $130 for food and $120 for transportation. This survival number is based on the bare minimum and not preference.
This is what my numbers look like:
$600 (Rent) + $120 (Transportation) + $130 (Food) + $40 Phone bill + $60 Miscellaneous = $950
When you have limited funds, basing your calculations on the survival number is a smart move, because no matter how things go you are taken care of.
HAVE A MINIMUM INCOME NUMBER
If things go your way, your minimum income number should be equal to or higher than your survival number. If you end up bringing in lower than your survival number, then the whole thing crumbles.
To calculate your minimum income number, you’d need to look at your employment history and find your worst month. For freelancers, calculate this based on the average of a couple of jobs in a month to be safe. How much is it?
For me, the worst month is $1,050.
NOW, LET’S BUILD THAT BUDGET:
You’ve calculated your minimum income and your survival number, let’s build that budget.
Prioritizing the different budget categories is something we have to learn to do, so you don’t prioritize Entertainment over Transportation, if the month ahead looks tight, it is best to use your survival number. I’ll see the projected income and subtract my number: $950 -$950=0.
I don’t have any wiggle space, but I have paid all my bills, which is the best I can do. If your expected income is higher than your survival number, then you can use your regular budget.
Make sure you revisit your budget throughout the month, your irregular income means your budget is also irregular this makes you understand what you need to do. Also, when you can, create a generous buffer for yourself, my suggestion is to have 10% of your minimum income unbudgeted if you can. Life is full of surprises, so when budgeting on an unpredictable income, taking the right precautions are necessary to maintain financial stability.