One of the realities of living the freelance lifestyle is a variable income. Every month, you make a slightly different amount of money (and sometimes the difference is more than slight). Even if you aren’t a freelancer, you might run into situations in which you have a variable income.
Planning your budget when you have a variable income can get a little bit tricky. You don’t always know how much you will have — and you might not even know when it will arrive in your bank account. As you prepare for your variable income, here are 5 tips for managing your budget:
1. Figure Out a Monthly Average Based on Your Yearly Income
Cash flow is one of the biggest issues when you want to budget on a variable income. If you want an idea of what to expect on average, determine that by taking last year’s income and dividing it by 12. That should give you a starting point for planning your budget on a variable income. Pay attention to this average, and make plans accordingly.
2. Use an Emergency Fund
Your next step is to start an emergency fund. Your emergency fund can help you cover on months when you don’t make as much. Set aside a planned amount each month for a rainy day. Also, pay attention to your monthly average and where you stand. Some months, you will make more than your monthly average. During those months, take the difference and add it as an extra payment to your emergency fund. This will help you build up your account to smooth things during lean months.
3. Try to Build a Core Income Base
Another tactic is to attempt to build a core income base. As a freelancer, you might look for a few steady gigs that pay each month. In exchange for this security, you might accept a slightly lower rate for some of your work while asking for higher rates on other projects.
If you work part-time, determine the minimum amount of hours you work each month, and use that as your core income base. Having a set amount that you can count on can go a long way toward helping you budget on a variable income.
4. Arrange to Pay the Most Important Bills First
When you have a variable income, you need to make sure the most important budget items are covered. This means making sure that you are covered when it comes to your housing, transportation, food and other needs. As soon as you receive your pay, earmark it for the most important expenditures. This means you might have to wait to get the things that you want, but at least you will be covered for the things you need.
5. Consider Using a Line of Credit to Smooth Bumps
Normally, using debt is a bad idea when it comes to managing your finances. However, if you are careful and responsible, you can use a line of credit as a backstop when you budget on a variable income. If possible, you can get a line of credit with your bank, and connect it to your checking account. Sometimes, your pay doesn’t come when the mortgage is due. A line of credit that automatically transfers to your checking account in these situations can help smooth your transactions. As soon as you receive your pay, you can get rid of the balance. In many cases, you can avoid paying interest if you repay the amount immediately.
Judicious use of a line of credit can help you avoid constantly dipping into your emergency fund and still keep you from paying interest. Carefully consider this method first, though, and realize that it’s not for everyone.
Your budget doesn’t have to be a huge problem, even if you have a variable income. You might need to plan a little more, and be aware of possible pitfalls, but you should still be able to come out ahead.