Income is like a rollercoaster to most employees of startups, especially those working in freelance or commission-based positions, or those who work with early-stage startups. The given month could present a bonus that was not expected, and the following could have your bank account sucking in the air. Then how do you responsibly budget when your income doesn’t follow a routine?
Wealthy or poor, depending on the stability of your income, the concept of planning your month-to-month spending is very clever and potentially very easy.
Why Should You Base Your Budget on Your Lowest Earning Month?
Whenever you are budgeting with a variable income, the lowest earning month must always be used as the bottom line. Say you earned $3,000 last month was the worst month of the last year; base your spending on what you assume to be your new normal. This provides you with a safe and secure framework and makes you stronger to have it through harder times.
When you plan your budget based on this worst-case alternative, then you will not spend as much, and conversely, will have more money left in the better months of the budget, which can be added to a savings account or put towards paying down debt. Using a digital budget planner can help an individual to structure the budget.
How Can You Categorize Expenses into Needs, Wants, and Luxuries?
A useful technique to use is the 50/30/20 Rule, but adapted for variable income. Divide your spending into:
- Requirements: Rent, Groceries, utilities, insurance, and loan EMI.
- Wants: Eating out, subs, non-essential shopping.
- Luxuries: Travel, gadgets, presents, etc.
When you’re poor, you have to quit the things you like and cut back. When income steps up, you can again indulge yourself – but wise.
Should You Create a ‘Zero-Based Budget’ Every Month?
Yes, particularly when it is making an unstable income. Zero-based budget is a sort of budget whereby you will not have a balance of zero until you have assigned a dollar to a job. You estimate in advance fixed bills, savings, debt, and variable expenses.
Every month will be different, and this practical budgeting method will help to make sure that the expenses you have are covered by what you actually earn rather than your desire to earn it.
What Role Does an Emergency Fund Play in Budgeting with Inconsistent Income?
The emergency fund is your holding tank. And to startup experts, it is not an option but a must.
Strive to save 3 to 6 months of living expenses in an account with a high interest earnings rate. This is not a gadget or getaway fund, it is your money seatbelt when there is a dry spell/unforeseen expenses, or a transition to another job. A OneNote template can help an individual to structure all of these perfectly.
How Can You Build a “Buffer Budget” for the Upcoming Month?
The use of a buffer budget is a progressive savings strategy where the current month is being used to finance next month’s expenses.
Begin your plan by first putting up a small portion of your high-income month towards the budget of the next month. Eventually, you can print a month in advance-allowing you to breathe and have more decision time flexibility.
It is not about eliminating uncertainty, but about anticipating and being prepared to achieve success despite it.
