Budgetnista, I don’t have a regular paycheck because I'm: self-employed, have irregular hours, never know how much I’m going to make, sooooo…. How do I budget?! I’ve been getting this question a lot lately, so I decided to write a post to answer it. - I was once a teacher and brought home the exact same paycheck every 2-weeks. As a result, budgeting was fairly easy. I knew what my bills were and what my monthly takehome pay was, so my (financial) life was pretty simple.
Fast-forward 5 years. I now do “The Budgetnista” full time and each month’s income is completely different from the month prior. My first year of full-time entrepreneurship was a rocky one. I didn’t know if I was coming or going financially. Then I finally figured out a system that worked for me and it can work for you too if you don’t have a regular paycheck.
1) Calculate your Financial Baseline: Your financial baseline is how much your life costs you each month without the bells & whistles. It’s your budget, excluding eating out and entertainment and most other non-necessities. Not sure how to figure out your financial baseline? Use Day 1 of my bestselling book, The One Week Budget, to get you up and running… don’t worry, it’s FREE HERE Once you know your financial baseline, you now know how much you need to make for your personal finances once your business expenses are covered (if you're self employed). Your financial baseline will also help you to calculate how many months you have in savings to cover those months when business is slow or your income is low. But more about that later...
2) Be Like the Squirrel: Squirrels are super-smart savers. When acorns are plentiful, they work their hardest and gather as many as possible. When acorns are scarce, they hibernate and live off of the nuts they've collected. We should all strive to be like the squirrel, especially entrepreneurs. Every business has a cycle. For The Budgetnista, I make the majority of my money in the warmer months. I’ve learned to work really hard and excessively save during those months, because once the weather gets colder, my income drops. During cold months, like the squirrel, I do less work (because less work is available), and I live off of the savings I’ve set aside. Even if you don't have a business, you can still squirrel away your money when times are good and live off of your stash when things aren't.
3) Live by Percentages: Those that receive a regular paycheck can live by exact amounts. They can calculate exactly how much they can save each month and how much they can set aside for bills, going out, groceries, grooming etc. But for those of us with irregular incomes, we have to live by percentages. What does that mean? That means each time I’m paid, I allocate a percentage of my income to different categories.
My current percentages and categories are:
45% : Expenses (bills, entertainment, groceries, grooming etc.)
20% : Taxes (Uncle Sam. This is the percentage amount my accountant suggested I set aside. My tax rate is higher than 20%, but after spending on my business throughout the year, I end up paying about 20% on the total amount I've made. Those that are self employed, pay taxes AFTER business spending, not before like 9-5 salaried or hourly workers who get taxes taken out BEFORE they receive their income. I also have an emergency and business saving account that I can use to cover the rest of what I owe during tax time if need be.)
20% : Retirement (investing)
10% : Give (donating)
5% : Travel (leisure)
If you receive fluctuating pay, you should decide what the categories are in your life and assign a percentage to each. Then each time you’re paid, allocate your income based upon percentages. You can do this with each payment received or do so weekly/biweekly/monthly depending on how frequently you receive payments. At the very least you should have Expenses and Retirement allocated. Set aside your the money for your Expenses category in the business/savings account I mention in the about in the “Pay the Pot” section below.
4) Separate to See: Once you arrange your finances by percentages on paper, it’s time to get organized in real life. The best way to gauge how close you are to achieving your financial goals is to house your money in different bank accounts. I have a Bills Account, a Spending Account and savings accounts for each of my savings categories.
You probably already have a Spending Account. It’s the checking account linked to your debit card. Next, you should open a Bills Account. This is a checking account that’s not linked to your debt card (this will prevent you from “accidentally” spending your bill money on your cookie addiction. Use your budget to calculate how much money you need to allocate to your Bills Account each month.
As mentioned before, having separate accounts for each savings category is a great idea! *pats Self on back* Here’s how to make that happen with the money you want to save… Open up free saving accounts at an online-only bank like Ally Bank. Use magnifymoney.com to help you find the best, FREE, bank for you.
Rename each account based upon your financial categories and send your allocations to each account according to your percentages, then watch your money stack! 🙂 You might be wondering, why an online-only bank? Online only banks take 2-5 business days to transfer your money back to your regular bank. Do you know what that means? That means no more impulse spending with your savings!
5) Pay the Pot: Once you use your squirrel powers to build up your (business) savings, it’s time to begin to pay yourself regularly. Use your budget to calculate what your personal, monthly spending is (include bills, entertainment, grooming etc). Once you identify how much you spend each month, pay it to yourself from your business/savings account aka THE POT. You can pay yourself monthly, biweekly or weekly. The choice is yours. What’s important is that you no longer get paid directly from your clients or income provider. Instead, your clients/income provider pays your savings account (THE POT), the money sits in that account, then you pay yourself a regular income from it. The trick is to pretend like you have a 9-5 and give yourself a regularly scheduled "paycheck".
6) Systemize: Now that you’re saving aggressively when things are good, paying yourself vs. waiting to be paid, living by percentages and have a different bank account for each of your financial categories, it’s time to automate the process. Creating a system is going to be essential for your financial success.
Begin by setting aside time on the same day each week to review your finances and make your transfers, if applicable. Also, make sure to automate your bill payments from your Bills Accounts. Most banks offer online billpay for free. Use it. Instead of letting companies come into your account, instruct your bank to pay each of your bills on the same day each month. You’ll only have to do this once…. Did I mention it’s free? Of course I did... I'm The Budgetnista. *insert giggle*
Look for other ways to automate your finances. You can automate transfers, like the transfer from your business /savings account to your personal account, now that you’re paying yourself. Consider it your Direct Deposit "paycheck transfer".
Tool: Now that you know how to mange your inconsistent income, here's a tool to help you. This is the Income Grid I created for my business to help me keep track of my income: Sample Income Grid. Got it? Does this seem possible? Do you have an questions? I'd love your feedback in the comments.
(Sidebar: remember to add your own categories and percentages in the sample income grid)
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