Updated January 30, 2014

How to Budget on a Fluctuating Income

Read more about Freelance Revolution

The recession has affected Americans in virtually every field and profession, especially when it comes to the freelancer. According to data published by the U.S. Census Bureau, the number of nonemployer businesses dropped by more than 260,000 from 2008 to 2009 alone.

While entrepreneurial activity has rebounded, many self-employed individuals are accepting contracts for lower compensation than they would have accepted in years past. This makes it difficult to stay on-track with bills, savings and having enough money left over for fun.

Americans in general tend to live by the habit of spending money as it comes in to our checking account. This habit works alright for individuals and couples that have a steady and reliable salary but when you are working on hourly wages or as a freelancer, a more calculated approach is necessary to ensure you are able to comfortably cover the bills – especially when you’re dealing with a soft economy.

Here are five steps you can take to help create a budget so you can live responsibly on your fluctuating income:

  1. Determine your monthly expenses

    Most people will tell you to determine your income and then build your budget. However, sitting down and determining your bare minimum, must-allocate-for expenses first will help keep yourself honest.

    When determining your expenses, you will want to itemize all of the basics you need to maintain your desired standard of living. This will typically include: housing, utilities, groceries, gas, car maintenance, insurance and taxes. It is important to include the annual and quarterly expenses like property and income tax to ensure you have enough funds set aside to cover these costs as they rear their ugly head throughout the year.

  2. Determine your estimated monthly income

    The easiest way to determine your monthly income is to look at the amount you have earned over the last 12 months. Divide this amount by 12 and you have your estimated monthly income.

    This method works best if you have a generally steady income. However, if you tend to take on season jobs that result in much higher income during one part of the year, this will throw off your monthly average. To solve that problem, you can either omit those months from your average (add up the more regular months and divide by that number of months), or choose the lowest month’s income from the last 12 months and develop a budget based off of that figure.

  3. Closing the gap

    If you have discovered that you are currently spending more on a monthly basis than your estimated monthly income, then it’s time to close that gap. You can accomplish this by either increasing your income, decreasing your expenses or a combination of the two.

    If you are a freelancer, such as a web developer, graphics designer, or content writer, it can take some time to see a consistent increase in income. This is especially true if you are just starting out and are still acquiring clients. Until you have established a steady income, you may want to find a part-time job to ensure you have enough money coming in to cover your bills.

    To help cut back on your expenses, you may want to identify your common splurges. Many banks and credit card companies now itemize your monthly expenses making it easy to identify your “unnecessary” transactions. These could be going to the movies, that daily cup of specialty coffee, or going out for drinks with friends. Of course, you don’t want to cut out all of your fun; so determine an amount you are comfortable with spending each month and earmark that as your “fun fund”. To help limit your spending, withdraw a set amount of cash either weekly or monthly that you use for your fun money.

    To help make the most out of your money, you may want to consider utilizing a cash back or rewards credit card for your everyday purchases. These cards allow you to accumulate points on your purchases that can later be redeemed for cash, bill credit, gift cards, merchandise or travel. Through responsible credit card usage (like watching for overspending and paying your full balance each month), you can save money over time because the accumulated rewards can go directly toward your “fun fund”.

  4. Pay your savings first

    To help ensure you are sticking to your budget, have all of your income deposited directly into a savings account. Once a month, transfer your designated monthly salary to your checking account. This is the funds you have to work with for the entire month.

    Even if it is an especially profitable month, keep strict about transferring the same amount each month. This will help you develop consistent spending habits so it becomes easier to stay within your budget. It will also help you grow your savings so you are able to transfer the same amount to checking even after months where income has been sparse.

  5. Create an emergency fund

    You will also want to create a emergency fund to help cover the unexpected expenses that are bound to happen. Creating a separate savings account will help ward off the temptation of draining your savings for vacations, leaving you uncovered for emergencies.

    To help grow your emergency savings, designate a monthly amount that you would like to deposit into the account. You can either set a specific amount or a percentage of your income, whichever works best for your situation.

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    With more than 17% of the self-employed workers in America classifying themselves as independent contractors or freelancers, the number of individuals who earn a living off of freelance work is on the rise.

Comments about How to Budget on a Fluctuating Income

  • reeha@git ideas
    on October 29, 2011 12:30 AM said:

    Thanks for this valuable information about budgeting. i always try to check my monthly budget and manage my budget by giving away my fashion things whenever there are some strict days comes in my life.

  • Lee from Iowa
    on December 8, 2011 9:16 PM said:

    HI Daniela,

    Speaking from experience, being a self employed individual, I would take what you suggested by finding your "average monthly income" and also find your "average monthly fixed expense" (all fixed structural expenses for the year totaled and divided by 12). Using averages, and tracking your monthly averages for both of these can really give you a birds eye view of your relative cash flow. It allows you to see through all the variability your talking about ;)

    Variability is the killer. It's rarely discussed.

    Lee ;)

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