Five Easy Steps to Budget and Save Like a Financial Wizard on a Fluctuating Income

Spring up and downWorking for yourself or on commission has a lot of upsides. You might get to work in your comfy flannel PJs, or perhaps your job allows you to spend more time with your kids or earn more than you ever could staring at a cubicle all day. Of course, self-employment or the sales life isn’t all sunshine and rainbows. For one thing, budgeting for the month can feel like shooting in the dark…with one hand tied behind your back.

After all, it’s kind of hard to plan and save when you aren’t sure how much you’re going to make this month, don’t know when your client is going to get around to paying you, and can only guesstimate what you’ll make next month. There’s just no knowing if next month will be gangbusters…or just a bust. Heck, you may not even know what next week holds in store for you.

Just because your income is difficult to estimate doesn’t mean you need to throw your budget out the window or give up on saving altogether. You actually CAN create some semblance of stability in your financial life and develop a routine of saving, spending, and paying off debt with just these five simple steps.

Step One – Determine Your Essential Needs

Start by figuring out the bare minimum you need to make each month to cover your necessities. These are things like your mortgage or rent payment, car insurance, gas, groceries, utility bills, etc. We would also add your 401k contributions to your list of necessary expenses. (Learn Why Women Need to Think Differently About Retirement.)

Gather your bills and credit card statements and then add up all of your essential costs. The end result is the amount you need to earn every month, or nearly every month to keep your head above water. If you regularly have trouble making this amount, then you need to consider downsizing your expenses (for example, maybe it’s time to sell the car for a less expensive model), work diligently to increase your income, or a little of both.

Step Two – Figure Out Your Discretionary Spending

Covering your essential needs will keep food in the fridge and the lights on, but it isn’t a very fun life. We all like going out to dinner with friends, catching a summer blockbuster on opening night, going to the gym, or splurging on tickets to a football game. Now, estimate how much you spend on non-essentials each month.

Reviewing your receipts or credit card statements over the last few months can help. Once you have this number, you now know how much you need to earn each month to cover all of your spending, the necessities and the fun, icing of life. If you have a lean month, that’s your red flag to immediately cut down on the luxuries so you don’t start digging a credit card hole of debt.

Step Three – Build an Emergency Fund

An emergency fund is a critical financial cushion for everyone, but especially for freelancers and salespeople. What happens if you lose your biggest client and it takes you two months to replace it? What if you spend a month chasing a hot lead and it doesn’t pan out? We all have bad months…and really bad months where we don’t even make enough to cover our essential expenses. This is where the emergency fund comes to the rescue. (Learn Five Mental Money Jedi Tricks to Build Up Your Rainy Day Fund.)

Ideally, you want to have at least six months’ worth of income in your emergency fund, but if that seems like a tall order, just start by opening an emergency fund savings account and dedicating a specific amount of your income to it each month. Consider this part of your essential expenses.

Step Four – Pay Yourself a Salary

Okay, this is where we put everything together from the previous steps. Instead of just cashing and spending checks as you get them, put them into a savings account. Then, once or twice a month, pay yourself a consistent salary. Ideally, this salary will add up to exactly the total of your essential and discretionary needs, so that you can cover all of your bills and splurge a little too. Another big benefit of this system is that it forces you to live on last month’s earnings, not a guestimate of what you might earn this month. This way, if last month wasn’t so hot, you can adjust your salary to only cover your essential needs and satisfy yourself with board game nights at home until you make a big sale this month.

Step Five – Invest the Excess or Pay Off Debt

One very important part of the self-salary system is that you should try to pay yourself the same amount each month to cover your essentials and normal discretionary spending. Ideally, since you’re such a great salesperson or freelancer, you will have extra money left over in your temporary savings account each month, because you’ve made more money than you need. Without a plan in place, it would be easy to spend this money. Instead, now that you are only living off the salary you give yourself, you can use this extra money for more important purposes.

Consider speeding up your emergency savings or paying down any lingering debt. You can also invest this money, since you’ll be earning a puny interest rate by keeping it in a savings account. (Did you know that Your Female Brain Can Make You a More Savvy Investor?)

With just a little planning and self-discipline, you can avoid the terror of crashing into a lean month with no savings and reliably cover your expenses! For more great saving and investment ideas, check out our article archive for women!

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