Budgeting with Irregular Income

Since I am self-employed, I’m keenly aware of how hard it is to budget when you’re not sure if or when another piece of business is going to come in. Let me share a story with you.

When I first started out in private practice,
all of my colleagues were eager to know how it was going.
I was getting business, but it was pretty awful.
But you never, ever say that.

Since I’m terrible at lying, I had to come up with a response or forever avoid social interactions, which was unrealistic.

I came up with, “I’m so blessed to be doing work I love.”

Feel free to use it.

Spoiler alert: At about the 18 month mark I began to get my financial footing and realized a bit of momentum and was officially profitable in my third full year. I’m happy to say that I’ve completed five years on my own, doing what many told me I was crazy to do, and loving all of it, even the awful parts.

We had two lovely meetings of the I HATE Budgeting group in May dedicated to learning how to  manage expenses with an irregular income. For many people, this is now their reality since the recession prompted many people who were laid-off or downsized to start their own businesses (which I think is wonderful, but it certainly has its challenges).

The first challenge of irregular income we identified was having regular monthly financial commitments (rent/mortgage, car/loan payments, utilities) that could not be altered (even by the very thrifty) conflicting with an irregular monthly income.

Attorney Heidi Jones (who was our gracious meeting host as well) shared that, when she started her private practice (Allen Street Consulting) she decided to “pack light” for the journey. What does this mean? She hasn’t owned a car or been to a mall in years. Having this financial freedom allowed the inevitable ups and downs in business income to not be a bigger stressor than it had to be.

Look at your financial commitments and determine how many you can be free from. If there is a year left on your cell phone contract, make it your goal to revisit that contract and research other options about two weeks before it’s due for renewal. Here is an interesting article about how debt imprisons you and may affect how you make future debt decisions if you have a desire to be free.

 “Freedom” by Zenos Frudakis

Get to know two things about a man. How he earns his money and how he spends it. You will then have the clue to his character. You will have a searchlight that shows up the inmost recesses of his soul. You know all you need to know about his standards, his motives, his driving desires, his real religion. – Robert J. McCracken

Prior to starting a business, if you have the time and resources, it’s highly recommended to stash a fair amount of cash in your “Financial Stress Reduction Account” (aka savings).

In a typical financial plan, we professional advisers encourage people to have at least three months worth of living expenses set aside. For entrepreneurs, I’d say at least six months (and preferably a years worth) of living expenses would be recommended to be stashed in savings.

How can you do this? How can you set aside money in savings? Just like there are many diets, there are many ways to save but you have to:

(1) find out what works for you and

(2) do it.

You can throw all of your loose coin in a jar.
You can do the 52 week savings plan (the one whereby the first week in January you save $1, the 2nd week $2 and so on. The last week of the year, you save $52 and you will have set aside $1378 for the year. I did it in reverse so that when the holidays rolled around in December, I only had to save $3 or less.)

You can save all of your $5 bills.
You can agree to set aside 10% of your income in a special financial stress reduction account.
You can sell your furniture and jewelry and stuff and put the money in your savings.
Whatever works for you.

Of course, determining your living expenses is at the core of this issue: How much do you need to live? It’s crucial for you to be aware of how and why you spend and whether it’s working for you or not.

The most important nugget shared at this meeting (also from Heidi Jones) was about the power of intention. You must identify what it is you are trying to achieve and then commit that you intend on achieving that goal. If there is any vacillation on your part, forget it, it won’t happen.

You may be wondering about the actual mechanics of budgeting with irregular income. A tactic I use when advising clients with ebbs and flows of cash is the “Three Budget Strategy.”

1. Lean month budget: This is your bare-bones living expense budget for when cash flow is unusually low. You may need to tap some of your cash reserves to make ends meet. I will repeat that it’s crucial that you become intimately familiar with what you actually need to live and how much it costs. In addition, if your business cannot reasonably generate enough income to meet your basic living expenses, you need to revisit your business plan. I estimate three-to-four months to be “lean” months.

2. Average month budget: This budget reflects an average business month and will add on to the lean budget some savings (both short-term and long-term), savings towards quarterly estimated tax payments, and some luxuries. Five to seven months will be “average.”

3. Flush month budget: This budget reflects the inevitable increased expenses of being very busy (unless you’re simply paid later for work done in a previous month) such as eating out, child care, housekeeping/yard help etc. In this month you commit to significant contributions to your short and long-term savings and money set aside for quarterly estimated tax payments. I estimate two-to-three months are typically “flush” so it’s important to make the most of them.

Tidbits

If you’re a business owner, it’s crucial you work on your business. You must know your unique value, gifts and offerings in order to successfully maneuver in the marketplace. “Release resistance and raise vitality,” as one participant stated; “You cannot grow in a soil-less garden.”

Regarding the lean budget: you will need to learn how to prioritize your spending and learn to do without social approval, how to put some blinders on so you can remain focused on your goals and priorities. Remember, the mall isn’t interested in your success (and anyone judging the car you drive isn’t, either).

And remember, you don’t have to do anything. It’s all about what you choose.

 

Peace and abundance,
Amy Jo