With many more people working freelance jobs, budgeting for an irregular income has become the norm for households with one or two income earners earning an irregular income. So how should freelancers budget for an irregular income? That’s a question many people are seeking an answer for, for it’s one thing to work here and there, or now and then, and quite another to lead a comfortable lifestyle, especially if they’ve dependents to look after.
Why budget?
Creating a budget is a simple way of working out how much money you need to go about leading a comfortable life and arranging your finances so your day to day activities, along with other expenses that inevitably arise, don’t exceed that figure. Regardless of what you do, or whether you earn a regular or irregular income, budgeting should be seen as a critical aspect of ensuring your finances are sustainable. If your income is irregular, like most freelance professionals, then the importance of creating a budget increases in importance because you’ll need to factor in times in which your income isn’t adequate enough to cater for your day to day expenses as well as the other expenses that inevitably arise.
Budgeting on an irregular income
Essentials, priorities and luxuries: The first thing to do when creating a budget is to compile three lists, the first with essential expenses, the second with priority expenses and the third with lifestyle choices, expenses that you’d love to have money to allocate to every month but can do without if necessary. This will help you to work out your budget using the 50/20/30 rule.
The 50/20/30 rule: This is a budgeting rule that allocates a certain percentage of an income to essentials, priorities and lifestyle choices at 50%, 20%, and 30% respectively. No more than 50% of your income should go to essentials, which are education, food, shelter and essential bills like electricity, gas, water, etc. 20% of your income should go to financial priorities like retirement funds and long term savings, whilst the remaining 30% should go to lifestyle choices which include internet and mobile phone expenses, holidays and outings, shopping and miscellaneous expenses.
Savings buffer/Rainy day fund: Creating a savings buffer or rainy day fund is an excellent way to ensure you’ve enough to cover expenses during periods when your income is lower than usual. Some advocate allocating 10% of to this buffer fund, perhaps taking 5% of total income from essentials and lifestyle choices each, though with some thought you should find it easy to work out a reasonable percentage.
Set up an extra bank account (or two!): Many find it advantageous to open another bank account or two as this provides them with an account to save into as a buffer fund for times of low income, and if required, another bank account to save for the future. Whilst some save into the one account, it’ll prove advantageous to keep the two separate, one account for emergencies (this could be combined with your savings at a later date) and the other strictly for future savings.
Use online tools: Nowadays there are many handy online tools that can help you reach your financial goals and these are especially advantageous for those with irregular incomes. The savings calculator is a handy tool that many people, and not only irregular income earners, have found advantageous to use because it enables them to work out a) how much their current savings will be worth at a future point in time, and b) how much they’ll have to save in order to reach a future savings target.