Buzz
If you're part of the gig economy, managing a budget can be challenging. A budget becomes essential when your income isn't consistent. Even if you don't feel like you're living paycheck to paycheck, it's tough to create and maintain a budget when your salary isn't predictable. So, how can you craft a budget when your income fluctuates each month? Here are our suggestions for building a budget around an unpredictable income.
Begin by tracking your earnings and spending
The first step in budgeting is to estimate the figures you'll be working with. Review your bank statements for the past six months and calculate your total income and expenses. From there, divide the total by six to get your monthly average. However, this average is more helpful for those with stable incomes. Keep reading to learn how to adjust your budget for varying earnings.
Determine your minimum monthly income
Once you've calculated your average income and expenses, identify the bare minimum needed to cover your basic needs. It's crucial to estimate this number conservatively to ensure you can pay for essentials during months when your earnings fall below your average. This way, you'll understand how much savings you need to get through leaner times.
Structure your budget using percentages
When your income fluctuates, it's not effective to set a fixed amount to save each month. Instead, determine a percentage of your income that you can consistently put aside. This ensures your savings will adjust based on how much you're earning.
Set a consistent “salary” for yourself
Since you're not tied to a single company's salary, why not create one for yourself? Your average monthly expenses can serve as a starting point, and you can adjust it as needed.
A self-imposed salary can be particularly useful if you're trying out a zero-sum budget. In this approach, your aim is to balance your income and expenses perfectly each month, leaving no money left over. A key strategy here is treating your savings as an expense.
For instance, if your monthly costs (rent, groceries, gas, etc.) average $3,000, consider that your salary. To follow a zero-sum budget, ensure you always have $3,000 to cover those expenses. In months when your earnings exceed $3,000, save the surplus. When your income is less than $3,000, dip into your savings to meet the $3,000 mark.
Make your emergency fund a priority
We've previously covered the necessity of building an emergency fund. The typical advice is to save enough to cover three to six months of expenses. This becomes even more critical when your income is inconsistent. Keep saving beyond the six-month benchmark to ensure you're prepared for unpredictable times.
An emergency fund provides vital security for anyone with an unpredictable income. You never know when you might face a prolonged low-income phase or lose a source of income entirely. It's essential to have enough savings set aside to cover basic needs when the unexpected occurs.
Budgeting can be tricky when your income varies, so allow yourself the flexibility to experiment with different approaches as you discover what works best for you.
