Budgeting on a FLUCTUATING INCOMESunday, September 12, 2021
A key personal finance management tool is budgeting. This simply means that your after-tax income should be allocated to your needs, your wants and to savings/debt reduction. But what if your career is one that is associated with variable income? In other words, you have income that fluctuates from one month to the next because you're self-employed, a part-time/freelance/contract worker, or perhaps even a gig worker who has become so, as a result of the current COVID reality. Does this mean that you're ineligible to budget?
In a word: no.
Granted, it may be a little more of a challenge for you to budget because of your inability to control the amount of money you make and the time you get paid. But, even with income irregularity, it is possible for you to achieve financial stability and get on the path to securing your financial goals.
Tips for budgeting on an irregular income
1. First, understand that this is a process that takes time. Like people who earn a fixed income, there will be a period of trial and error and closely observing and cataloguing your financial patterns of earning and spending. This is the basis of any budget.
2. Like workers who take home regular monthly pay cheques, budgeting is a two-pronged approach. First, determine the amount of money you're bringing in. In your case, this calculation will of necessity be a rough average. You will need to track a few months' income, let's say six. If you have more than one gig, be sure to take them all into account.
3. Then you should determine how much you're spending. Set down what you've been spending money on over the last six months. (There are apps to help with this if that's your thing.) Include what you spend on for necessities, like rent, grocery, bills, and the like. Remember to calculate, as part of your necessities list, taxes.
4. Now record what you spend on wants, like entertainment, a new smartphone, or even a weekend trip to the country with your friends. Be very clear about the difference between needs and wants. You're trying to arrive at realistic data on what you're earning and spending, so it is important to be honest in your calculations.
5. Next, add up the six months' worth of income figures and then the six months' worth of spending. Then divide the total of both categories by six to get a rough estimate of your average income and expenses by month. Your average monthly income is now what you can refer to as your “salary”, and your average monthly expenses are a baseline for what you can say you spend, roughly, each month.
The 50/30/20 budget rule
After you've discovered what your average earning and spending figures are, then you can now streamline your finances. From the average income you bring in, 50 per cent should roughly go towards your needs. Thirty per cent should go towards your wants. The remaining 20 per cent should be allocated to saving or paying down debt, like your credit card balance, for instance. Or, depending on the severity of your debt, perhaps you could opt to put 30 per cent towards debt repayment and 20 per cent towards your wants. This so-called 50/30/20 rule isn't set in stone; it's merely a guide to help you focus and become intentional in how you handle your finances.
If at this point you realise there's a deficit, you will have to make some adjustments. Let's say you can meet your necessities but what's left over can't adequately cover both wants as well as savings/debt repayment. If the freelance state in which you find yourself is a temporary one and you hope to find yourself once again within the regularly salaried ranks, you can cut back in the area of spending on things that aren't necessities.
But, let's say a freelance career is something you see with enormous potential in the long term, maybe cutting back on discretionary spending isn't necessarily the answer, and so another strategy might be better employed. For instance, factoring in your costs into what you charge for your freelance services.
The bottom line
In these days of pandemic, when some employers are looking to cut costs by engaging temporary rather than permanent talent, and workers are finding it relatively easier to work from home and outside of the stresses of a formal office setting, there has never been a better time for the growth of freelance businesses.
In fact, speaking on the Jamaica Business Development Corporation (JBDC) weekly online series, 'JBDC Virtual Biz Zone', last September, CEO of Ingenuity Technologies Melarka Williams, under the theme 'Growing Your Business using Freelancing', highlighted what we already suspected: the world has now made a digital transformation which the novel coronavirus pandemic only spurred on faster.
“You have access to high-quality digital talent without having them permanently on your books but still being able to benefit from high-niche skill sets, trained and qualified talent with extensive experience. Therefore, this saves money that would be spent on traditional recruitment costs and permanent talent,” he told business owners.
The number of freelancers is rising, urged on by an increasing desire for a more flexible work schedule than that offered from more conventional careers. So, if freelancing is where you see your career headed permanently, don't be guilted into thinking you can't build a successful business from it. A fluctuating income is no excuse to not realise your financial goals.
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