A lot of professionals, business owners, and freelancers live on a fluctuating income. The growing number of digital nomads and freelancers means there are more people who rely on income that varies from project to project, pay check to pay check. There is nothing wrong with earning a fluctuating income. However, keeping your personal finance in control is a bit more challenging in this situation.
I said more challenging, because there are still ways you can control your personal finance meticulously when you have fluctuating income. These tips and tricks we are about to discuss in this article will help you manage your personal finance better, even when your income is unpredictable.
Start with the Bare Minimum
Rather than worrying about budgeting based on your income immediately, the best way to start organizing your personal finance when you have fluctuating income is by focusing on your expenses first. Start by documenting your regular expenses and working your way towards the more irregular ones.
Figuring out your bare minimum should be easy. You take the loan repayments and expenses that reoccur every month (i.e. your energy bills and internet subscription) as your starting figure. Continue by adding other basic expenses such as meals, transportation, and everything else in between to the equation.
The total is your bare minimum. You will use this figure as your benchmark as you try to organize your personal finance better. As long as you can allocate your income to cover these basic expenses, you can continue to improve other parts of your personal finance as you go along.
Calculate Your Lifestyle Expenses
Other than the basic expenses that you absolutely need to cover, there are also expenses that can be classified as lifestyle expenses. The cup of coffee you buy on your way to a meeting, the cost of traveling to clients’ locations outside of the city, and the money you spend to have fun on weekends or to dine out are all considered lifestyle expenses.
There is nothing wrong with them either. You are allowed to spend your money to have a bit of fun and enjoy a good lifestyle. However, these expenses need to be kept in check when you are living on a fluctuating income. They are the expenses you need to be willing to cut in certain situations, particularly in situations where your income cannot be allocated to cover them.
Set a Baseline
Now that you have your expenses mapped out, it is time to look at your income. Whether you are a freelancer or a business owner, a fluctuating income means you have months where you earn more than you need, and other months when you earn little to no income at all. With better personal financial management, you can manage both situations equally well.
You already know the basic expenses you need to cover, so the first thing to do upon receiving your income is setting aside that amount. Next, before you start budgeting for lifestyle expenses, save a portion of your income for two purposes. Ideally, you want to set aside 30% of your income. Save 1/3 of that 30% for emergencies and the remaining 2/3 for long-term savings and investments.
Lastly, allocate your income for the lifestyle expenses. Remember that you have to keep these expenses in check, even when you earn more than usual. If you have more money to allocate, repeat the steps again, starting with covering your basic expenses, adding money to your savings, and another round of budgeting for lifestyle expenses.
Know Your Options
That last part – repeating the steps when you still have more money to allocate – is important. You are covering the following months while you have money to allocate, giving you the luxury of not having to worry about your fluctuating income.
It is also recommended to understand the financing options you have when you do need to fill gaps in your monthly budget. There are a lot of short-term loans and financing options you can now use to stay financially healthy during times when your income is smaller than usual.
You still have the emergency fund acting as a safety net too. Only resort to using your savings and your emergency fund when you have no other options to explore. If you budget your income properly using tips we discussed in the previous part, you will have a strong personal financial foundation to work on and you will not have to use your savings and emergency fund at all.
These are easy tips you can implement right away. Getting started with managing your finances better is always challenging but overcome the challenges and you will be rewarded with true financial freedom. Maintaining a healthy cash flow and growing your savings account are both easy when you know how to stick to the budget. It won’t be long before you can start investing and developing new sources of income.