Getting a reliable budget in place is key when it comes to fluctuations in income.
Savvy budgeting relies on two things: controlled spending and a regular income. The first part we generally have control over; the second, however, can be tough especially in today’s world of uncertain economic times and world politics. When one of those two things gets out of whack for any reason, a budget can simply fall apart, and projects things can go seriously awry. If you suddenly lose your income because of a job loss, or if you change careers to start your own business, your bottom line and your budget can be impacted. There are nearly 15 million people who, according to the Bureau of Labor Statistics, are self-employed as of 2015. Many more are paid on commission or sales, which causes their income to fluctuate from month to month. There are ways you can protect yourself from fluctuations in either aspect, however. Follow these simple steps to create a budget that works for your unpredictable income.
The purpose of a budget is to get a handle on just how much money you need to go about your daily life. This includes your mortgage payment or rent, car payments, insurance, food, and healthcare expenses. Break your spending into three categories: essentials, priorities, and lifestyle. Essentials are things like housing and food. Priorities are things that are important but that you could do without if you had to—these include things like your car or new clothes. Lifestyle things are things that are nice-to-have not need-to-have things like a gym membership or that Amazon Prime membership. If things get tight, then the first place to cut is lifestyle.
The key to this method is getting a good handle on your baseline spending—those essentials. It’s important to include things like health insurance, housing, food, and transportation in the essential category. These are the items that are required to simply live your life day-to-day. An inability to pay any one of those items could end up causing problems. When you are calculating something like food costs, use the bare bones cost of groceries that you could get along on. Don’t include things like coffee shop runs or eating out. Those fall under lifestyle spending.
When you are setting up your budget, it pays to stick to the 50-20-30 rule. Roughly 50% of your income should go to essentials like housing, food, and transportation. Twenty percent of your income should go to financial goals—things like reducing debt, investing, and saving for a rainy day. Financial advisers say that you should have at least six months’ worth of pay saved for an emergency. That number should be based on the take-home income of your household’s highest earner. For example, if you take home the most per month and your paycheck is $5,000 a month, a good emergency fund would be $30,000. If you have a large amount of debt, however, and the interest rates on those debts are very high, it pays to pay down the debt, too. Using 20% of your income to handle the debt and save for a rainy day is the best way to tackle that.
Diversification is crucial to secure the future for you and your family as well. Consider choosing something like an IRA or a self-directed 401(k) to save for the future. We here at U.S. Money Reserve offer a Self-Directed Precious Metals IRA through our Gold Standard IRA program that you can use to save for retirement if you so choose. That money will come out of the 20% slice of the budgeting pie. The other 30% of your income should go to your luxuries—like travel and eating out. Budgeting, after all, isn’t all about what you can’t have.
Once you have your baseline figured out, experts suggest that you use that number as your “paycheck.” Set up a bank account where you’ll transfer that amount of money to pay your bills every month. That’s your bare bones account that you should draw from to pay your necessary bills when they come due. When your income goes up or down from one month to the next, you should be able to pay those bills from that account without sweating the fluctuations.
Another thing you should consider if you have inconsistent income or if you are self-employed is saving for taxes. You can use this online tax calculator to figure out how much you should put aside for Uncle Sam each year. You should add this to your baseline so that you can put that money aside each month. When the tax bill comes in April, you won’t have to scramble to figure out how to pay it.
If you follow these simple steps for setting up a budget when you have inconsistent income, you’ll be sure to come out on top. Getting a reliable budget in place is key to peace of mind when it comes to fluctuations in income.
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Angela "Angie" Koch is CEO of U.S. Money Reserve, one of the largest private distributors of U.S. government issued gold, silver and platinum coins. Angie oversees every aspect of operation, while setting culture and pace for the entire organization. With a proven background in business planning, strategy, mergers, acquisitions, and operations, Angie has an in-depth understanding of how to run a successful business and is credited with creating the analytic and KPI structure at U.S. Money Reserve. Believing strongly that the people make the business, Angie has positioned U.S. Money Reserve to be a trusted precious metal leader that always puts their customers and employees first.