Managing your money can be a challenge in the best of times, but it can become downright difficult when you have irregular income. If you have a hard time knowing how much money you will have from paycheck to paycheck, then the key is to find out how to create a budget that works well in both the healthy months and the lean months. These tips can help you do just that.
Managing Money With Irregular Income
1. Stick to a conservative budget. Examine your past income patterns on both a monthly and annual basis to come up with a conservative budget. Look at your last 12 months of income, and write down your lowest monthly income. Do the same thing by looking at your last few years of annual income and write down the lowest annual income you have had, then divide that number by 12. Use these two numbers to come up with a conservative budget. If these numbers represent the worst income you might have, then you want to make sure you don’t overspend your income.
Be sure to include you savings in this budget, otherwise you won’t be able to continue making your retirement or other investment contributions.
2. Slash your fixed monthly expenses. The biggest problem most people have with their budget is their fixed expenses. The more fixed expenses you have, the more difficult it is to make ends meet when you have less income. Do what it takes to reduce your fixed expenses, such as getting out of debt, paying off credit cards or loans, refinancing your mortgage, doing a 0% balance transfer to eliminate credit card interest, moving to a less expensive house, cutting cable or other expensive subscription services, etc.
3. Bank the difference. Let’s go back to conservative budget. We created this to be conservative for a reason – you never know when your income will be high or low, so it’s important to plan for the worst so you are always prepared. That is why it is so important to save any extra money when you earn more than your budget calls for. The best place to send your extra cash, at least until it is fully funded, is an emergency fund, which we will cover next. Once you have your emergency fund filled, you should work on paying off any debt you may have, or contributing to retirement account or other investments.
4. Create a robust emergency fund. Your emergency fund is more important when your income is volatile, especially if your employment situation is uncertain, such as a freelance worker or if your industry has experienced layoffs or other employment issues. If your career isn’t what you would consider to be stable, then you need to set aside more money for emergencies than the average person. Instead of saving 3 months of income in a cash account, consider saving up to 6-12 months of income if you can.
5. Invest the right way. Start by maxing out your 401(k) if you have a company match on your contributions, otherwise, start with a Roth IRA, if you are eligible. Then work toward maxing out both of these investments. If you find you have more money to invest or you have non-retirement goals, then open a brokerage account for non-retirement investments. Because of the nature of your income, you may wish to have more cash available, or a lower percentage of your portfolio invested in retirement accounts. This may be a good idea, since early withdrawal penalties can cost you a lot more than you think.
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