Irregular income? Here's how to budget.
Here鈥檚 a recent reader question that applies to lots of us, including yours truly鈥�
Hi Stacy, I read your Money Talks News first thing each morning! I have a question. How does one budget, save, get out of debt, have money for quarterly taxes, etc., on an erratic income. I am an independent contractor and sometimes clients pay and sometimes they take a long time to do so. This is pretty tough on my finances. I don鈥檛 like to push for payments because I am afraid work will dry up. Do you have any suggestions? Thank you very much.
Best wishes,
Zena
Every year about this time we publish articles like "How to Make a Budget You Can Stick With"聽explaining how to create a spending plan 鈥� something essential to accomplish your financial聽goals.
A spending plan, otherwise known as a budget,聽is about聽tracking your income and expenses so you can find the extra money to achieve your goals.聽But a spending聽plan has three necessary ingredients: a goal, an estimate of expenses, and an estimate of income.聽If you can鈥檛 estimate聽your income, you can鈥檛 plan. And there鈥檚 a lot of people in this position, from commissioned salespeople to the self-employed. I鈥檓 one of them: The last time I received a regular聽salary聽was April 1981.
How to budget with a variable income
When it comes to planning around a variable income, there鈥檚聽no simple technique allowing you to accurately predict the unpredictable. And the more your income varies, the harder it is.聽If your income fluctuates by 10-20 percent, no big deal. More problematic is income that fluctuates a lot. My 2009 income plunged 90 percent from what I made in 2008,聽and I聽didn鈥檛 see it coming. In 2012, I made more than twice as much as I did in 2011, and again, it was a surprise.
So what are those of us with wildly fluctuating incomes聽to do? The best we can. Here are the steps to take:
Step 1: Create a spending plan
Start your budget with what you can estimate: your expenses. Create your plan and automatically track your expenses with a free online budgeting tool like聽, the service I use.聽Open a free account,聽provide your checking聽account information, and聽the site automatically tracks money spent and assigns it to the categories you鈥檝e established. There you have it 鈥� instant expense tracking. The only thing you鈥檒l need to manually input is cash expenses.
So if you haven鈥檛 tried an expense tracking service like聽PowerWallet聽or Mint, do it. They require less effort than software like Quicken聽or聽manually entering expenses into a聽budgeting聽spreadsheet.聽And that鈥檚 important, because the more automatic you make budgeting,聽the easier it is to stick with.
Step 2: Estimate your income
As I said above, there鈥檚 no magic bullet. If you expect your annual earnings to come close to what you earned last year, simply divide last year鈥檚 income by 12 and you鈥檝e got your monthly income. If you聽realistically expect it to be higher or lower,聽adjust that number accordingly. But if you have no idea what your income might be, that鈥檚 not an excuse to stand like a deer in headlights and do nothing. You鈥檙e better off with a lousy estimate than none.
Keep in mind that when聽estimating either expenses or income, you鈥檙e allowed to聽be wrong.聽It鈥檚 OK to make adjustments 鈥� that鈥檚 normal. A budget isn鈥檛 a diet 鈥� it鈥檚 not about deprivation, or right and wrong. It鈥檚 about choosing how to allocate your resources in accordance with your wishes. Whether it鈥檚 income or expenses, get started, then make adjustments as you go along.
Step 3:聽Make your variable income fixed
Want a regular salary so you can plan better? Give yourself one.
Open two bank accounts: a checking account and a savings account. Every time you receive money, deposit it聽into your savings account. Then, every two weeks (or every week or month 鈥� whatever you like) transfer the amount you聽estimated above into your checking account and use it to pay your expenses and fund聽your goal.
When you have 鈥渇at鈥� months, you鈥檒l build savings. When times are lean, you鈥檒l draw from savings to keep your 鈥渟alary鈥� intact.
If you have a big savings balance at the end of the year, divide it by 12 and give yourself a monthly raise. If you don鈥檛 have enough in savings to make it work, you鈥檒l have to take a pay cut and take a hard look at your expenses so you can stay on track to meet your goals.
It may take time to discover your聽correct 鈥渟alary,鈥� and聽if your income fluctuates as wildly as mine, you may never find it.聽That鈥檚 OK.聽This is about progress, not perfection. The simple fact that you鈥檙e looking at your expenses and striving for a goal is going to radically increase your odds of success and your control over your money.
How to push your clients for payment
In addition to an irregular income, Zena also has a problem with getting clients to pay without being pushy. She says,聽鈥漑S]ometimes clients pay and sometimes they take a long time to do so. This is pretty tough on my finances. I don鈥檛 like to push for payments because I am afraid work will dry up.鈥�
There鈥檚 a simple solution for late payers: Make it profitable for them to pay promptly. Ever heard of 鈥�2/10,聽net 30?鈥� It allows a client to take a 2 percent discount providing they pay within 10 days, but full payment is due within 30.
I don鈥檛 know if this will work for Zena, but if she鈥檚 willing to take a small haircut to get paid faster,聽she should put this policy on her invoices, then send a carefully worded聽email or letter to her clients. She鈥檒l present it as a new benefit: 鈥淕ood news! For my best clients,聽I鈥檓 now offering a discount of 2 percent for invoices paid within 10 days. Take advantage of it and save money!鈥�
Will it work for everyone? Nope. But a carrot like this is a better way to approach clients than the 鈥渟tick鈥� of pushing for payment.
Stacy Johnson is the founder and editor-in-chief of聽, a consumer/personal finance TV news feature that airs in about 80 cities as well as around the Web. This column first appeared in Money Talks News.
