If you’re an entrepreneur or self-employed, you’re surely on a first name basis with inconsistent income. Let’s be real, learning how to budget is hard enough when your income is consistent. When you throw in the curveball of inconsistent income, your finances can feel downright out of control.
While you might be tempted to throw your budget out the window, I caution you to think twice. I’ve been an entrepreneur since I was 19 years old, and having a budget in place has been one of the smartest money moves I’ve made to manage the ebbs and flows of income and expenses. Always remember, a budget is just a tool that directs your money where to go and an essential part of your financial plan if you have inconsistent income.
Why you need a budget
It can’t be said enough – if you are working with inconsistent income you need a budget. In fact, everyone needs a budget even though most people hate the idea of a budget. Learning how to budget the right way can be tricky, but is totally doable.
One of the best pieces of advice I’ve given my clients over the past decade is to change the word “budget” to a word that excites you. For instance, I love to travel, so my budget is called my travel itinerary. It keeps my head focused on the why behind my budget each month. I encourage you to change the word budget into whatever excites you and will keep you motivated to stay on top of your finances.
So, what is a budget?
A budget is a tool to help you achieve your goals – personal or business-related. Your budget tells your money where it needs to go to fund your expenses and financial goals. Tracking the money that goes out of your bank account (your expenses) is essential if you’re working with inconsistent income. There are some simple steps to mastering this each month.
- DIY your budget with an Excel spreadsheet, Post-It notes, paper, or whatever works for you. Download my free Signature Budget Worksheet to help you out.
- Or choose a mobile budgeting app like You Need A Budget or Clarity Money. Start a FREE 34-day trial of You Need a Budget.
- Find out what your must-have number is – this is the number that includes all of your fixed expenses that you have to pay each month. Your must-have number is your starting point to build your budget on.
- Categorize every penny that leaves your bank account, so you know what is going on with your variable expenses – those expenses that change every month. (Hint: your variable expenses is the place where most budgets break down so spend some time getting to know these expenses).
- Set spending goals for any category that you feel is out of control (Hint – for most people that is eating out and uncategorized fees like ATM fees and Uber or Lyft rides).
- Calendar weekly a weekly money check-in so you can review your expenses for the week, set goals for the week coming up, and direct any excess income towards your goals.
Check out these budget-related podcast episodes to help you ace your budget:
- How to Budget the Right Way
- Get a Life You Love on a Budget You Can Afford
- Crack the Code on How to Save and Invest on Any Budget
- Budgeting Sucks, No One Has a Plan, But You Can
- Budgeting When the Numbers Don’t Make Sense
Have an emergency fund
Traditionally, you should look to save between three to six months’ worth of fixed expenses in a savings account, ideally, a high-yield savings account, for your emergency fund. However, if you’re working with inconsistent income, your goal should be to save between six months to a year’s worth of expenses.
That may take you a while to achieve since your income is in flex, but if you’ve ever had a month where you’ve struggled to make ends meet, you understand the importance of having a savings safety net.
If you aren’t sure where to begin to supercharge your savings, start with the first step of knowing where every cent is going from your bank account. This allows you to track patterns and find savings that are hidden in your bank account. You might notice that you’re indulging in some unnecessary expenses each week that you can cut back on and then route those savings to your emergency fund.
In the land of inconsistent income, you’ll need to pull out every money trick you have available to you. That begins with thinking about your money differently.
Opening a high-yield savings account at an online bank such as Marcus by Goldman Sachs or Ally Online Savings is a great place to start. On average, online savings accounts offer higher interest rates for your savings, which means more money in your pocket. Earning more money on your money is a great place to start when you’re ramping up your savings.
Make a budget plan that works for you
The idea of budgeting might not sit well with you, but the good news is you can make a budgeting plan that works for you. As long as you are actively tracking your expenses, you can create a budget that meets your needs both functionally and aesthetically.
For instance, meet Amanda. Amanda is 31, a single freelance writer and content strategist, who deliberately plans for July and August to be income-free months. “I love traveling in the summer, and for me, it was a big reason why I decided to jump into the freelance life. Sometimes, I get checks, or a project runs over, but in general, I know that I need to budget to cover those two months whenever I work on projects throughout the year.” Amanda has made her budget work around the lifestyle that is important to her. You can make up rules that work for you.
- Build a travel savings fund so you can take a month off to travel
- Build in a reward each month if have excess income and stayed on task with your budget every week
- Scale back on retirement or college fund savings in months where you’re not as flush
- Use a rewards credit card for points or cash-back that you can use for holiday gifts
- Break big goals like saving for a house or planning a wedding down into small monthly savings goals and incorporate them into your budget. In a month where you have excess savings, you can allocate more money towards those goals and then scale back in months when you need to
Bounce back from a mistake
Miscalculation and mistakes happen to the best of us. You thought a project was going to come through and it ended up falling away leaving you short on money for that month. It can leave you feeling like you’ve failed and lead to a big confidence crash. I should know, I’ve been there myself many times in my long entrepreneurial career. The good news is you can re-calculate.
Fear breeds confusion and confusion leads to mistakes in your finances. If you find yourself in the position of a miscalculation or mistake the first place you turn to is your must-have number. How much money do you need this month to pay for your must-have expenses? Once you’re armed with that number, you can find out where you’re short and head to your emergency fund for some relief.
If your emergency fund is need of some help of its own, taking on debt would be the next logical step to bridge the gap. In this situation, you’re looking for debt with the lowest interest rate that is available to you. This might be a credit card you use for business or a personal loan from an online lender such as SoFi or Lending Club.
Remember only to borrow what you need to bridge your financial gap and calculate what your monthly payment would be to pay off the debt ideally within three months. Once you have that number, add it onto your must-have budget list so you can pay off the debt quickly.
Use mistakes to help you
Don’t beat yourself up. Again, mistakes happen to us, all and it isn’t a sign of weakness. Figure out a plan to cover the financial gap, put that plan into action, and then move on. Do your best in months of excess income to save as much as you can in your emergency fund so when you miscalculate again (and you will, and it will be ok) you’ve already created a financial safety net.
Sticking with a budget to manage inconsistent income takes time and practice to form a habit. As an entrepreneur, I can identify the months when I stay on track, manage my expenses and use my income as a tool to achieve my goals from the months when I don’t, and my finances suffer.
There’s no perfect score when it comes to budgeting with inconsistent income – sometimes you’ll have it all together and other times you won’t. There’s no need to stress – while your income may ebb and flow you can create a budget that stays consistent with some practice.
Disclaimer: This post includes affiliate links, and I will earn a commission if you purchase through these links. Please note that I’ve linked to these products purely because I recommend them and they are from companies I trust. There is no additional cost to you.
Shannah Compton Game is a Money Wellness expert, host of the to-rated Millennial Money podcast, and CERTIFIED FINANCIAL PLANNER with an MBA. Millennial Money has over 15 million downloads in 164 countries. Shannah’s years of experience as a skilled Certified Financial Planner have set her on a mission to revolutionize how people think, act, and feel about their finances…and have some fun doing so.