How to Budget an Inconsistent Income

Michael Jordan once said:

The game has its ups and downs, but you can never lose focus of your individual goals, and you can’t let yourself be beat because of lack of effort.

Similar to the ups and downs of a basketball game is trying to achieve financial success on an inconsistent income. Whether you’re a wedding planner, construction manager or 1099 contractor, you can budget an inconsistent income.  Budgeting is still important to achieving financial freedom even if your income isn’t steady.

Budgeting with an inconsistent income differs from having regular paychecks, but it still can be done with these three simple rules.

1. Know the needs

Just like any other person budgeting, when on an inconsistent income, you must calculate the must haves in your life and figure out how much they cost.

Needs are true needs:

  • the rent or mortgage
  • electricity
  • groceries
  • auto or other transport costs to work – perhaps that is the Internet if you telecommute
Forbes Magazine gives a quick rule of thumb of 50/20/30.

These “must have” needs should not be more than 50% of your income. If they are higher than 50%, please check out other articles and learn how to reduce your fixed costs.

In this category, realize that different times of the year may have slightly different costs. For example, in August, you might spend a good bit more on air conditioning than in April.

Don’t forget to include savings to pay taxes, especially if you are an independent contractor.

Be conservation in your calculations. Better to have more money than you need to cover a cost than the other way around.

2. Save – rainy days and retirement

You have more than just day to day expenses in life. The ‘other’ is where your rainy day fund and retirement savings needs to come into play.

The 20 in 50/20/30 is for 20% savings.

Savings is broken up into short term savings – emergency fund, vacation, holiday gifts – and long-term savings – retirement!

As a person with income that moves from boom to bust, a healthy emergency fund should be a first goal. This can be three months of expenses or up to a year. Start saving every month to build your emergency fund, and then move on to savings for retirement and other goals.

Investment advisors such as TIAA-CREF recommend regularly saving 10%–15% of your income for retirement.

With a built up emergency fund and a plan for retirement, use the 20% total goal for savings for items in future months that are outside your basic needs.

Many online banks allow multiple, free online savings accounts:

  • Make an account for an emergency fund and build it up.
  • Have retirement savings automatically drawn from your checking if possible.
  • Have another account for savings for near-term savings goals – the vacations, new car, etc.

If money is not in your checking account, then it is harder to spend, and more likely you will save it.

Don’t let these percentages scare you.

According to Moody’s Analytics, the average savings rate for someone 35–44 is only 2.6%.

If you can start saving 5–10% for retirement, you will be above average from most everyone else and much better off in the future.

3. Money for living

At this point in your budget, you’ve covered your most immediate needs and planned for emergencies and retirement. The final 30% can be for whatever you’d like it to be – which is all the other expenses for living in modern life.

Thirty percent might seem like a lot, but this goes to all your flexible items such as dinners out, gifts, clothes, cable, etc. Sometimes these items will go to necessary things, such as buying your children back to school items or a car’s oil change.

It is simpler to leave these expenses to the final 30% than trying to budget all year for every possible expense.

Try not to use your emergency fund for these personal living expenses. School shopping is not an emergency. Anniversary presents are not an emergency (some people might disagree).

Some months will be better than others in the boom and bust of life. Since you will have a plan, as Michael Jordan would say, you will be able to focus on your goals and nothing will be able to beat you for lack of effort.

Question: Do you have an inconsistent income? How do you handle your expenses? Please leave a comment below.

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