As a freelancer, business owner and financial blogger, I am utterly obsessed with finding ways to manage money – especially when it comes to managing irregular income. It’s easy to budget when you’ve got a steady paycheck, taxes are taken out automatically and you have zero business expenses (including those pesky payment processing fees), but when you freelance it’s an entirely different animal. In fact, my accountant and I joke that managing irregular income is some form of organized chaos.
Fortunately, I got in the habit of listening to financial podcasts and reading financial blogs many years ago in an effort to sort out my finances. At first, it was basic knowledge that applies to regular paychecks, but as more of these bloggers start freelancing themselves there’s now a wealth of information available on managing irregular income. Here are just some of the methods they talk about.
Zero Sum Budget
The Zero Sum Budget is my personal favorite as of late. I like simplicity and, in my opinion, it doesn’t get any more simple than this.
The Zero Sum Budget is when you give each dollar a purpose or an assignment until you’re left with a “zero balance” at the end of the month. For example, in using the Zero Sum Budget whatever money I have left over after paying business expenses and bills, goes into designated savings accounts.
I may throw in an extra $400 into my travel fund if I have a trip coming up and then an extra $300 into my emergency fund. Last month I threw in an extra $500 into my IRA.
The point is you give every dollar a purpose so that it doesn’t just sit in your checking account waiting to get spent. Additionally, it forces you to become very intentional with your money and determine why you’re saving.
Using the Average to Budget
Another method for managing irregular income is to determine the average amount of money you made in the last three or four months and use that to create a budget. Anything that comes in as extra (as it often does) can go into savings, toward paying off debt, etc.
It should be noted that this is the average after business expenses and taxes. This also forces you to sit down with your business accounts every few months to see what’s going on. Some people see this as a drag, I personally consider it an added bonus.
The 50/20/30 Budget is a popular method for managing money because it allows you to meet your financial responsibilities while still having flexibility. It basically looks like this:
- 50% of your take-home income goes toward needs (housing, food, etc.)
- 20% of your take-home income goes towards savings and paying off debt.
- 30% of your income goes to your wants.
This helps you meet the minimum 20% savings rate financial experts say everyone should have. It also allows you to have wiggle room and actually enjoy your money at the same time.
This is a good budget for people who hate budgets. Simply put, it allows you enough flexibility where you don’t feel like budgeting is a drag. The one caveat here is that you have to determine your take-home pay, meaning what you have left over after taxes and business expenses. In this case, you may want to consider determining your average take home pay before using this method.
Trying to budget when you have irregular income can seem like a complicated mess. When it feels this way, it’s important to remember that you can figure it out every month. By using some of these budgets, it will become easier to manage the irregular income you make as a freelancer.