Successful budgeting tends to depend on two things: careful planning and a steady income.
The first, anyone can do. The second isn’t so simple.
If you’re self-employed, you might be asking yourself: “But I don’t have a regular paycheck coming in. Can I even set up a budget? Should I bother?”
You can. And, yes, you should.
A budget is simply a way of figuring out how much money you need to go about your daily life, and arranging things so that you don’t exceed that number. No matter your situation, budgeting is a critical part of making sure your finances are sustainable. (And it no longer requires a pen and paper: The free LearnVest Money Center and corresponding app will do it for you automatically.)
Budgeting is especially important if your income is irregular, such as if you’re a freelancer, a temp worker, a consultant, an artist, a permanent employee with fluctuating hours, or a commissioned salesperson. Or if you do seasonal work, if a big part of your income depends on tips, if you own a small or startup business, if you’re on call, or if you are simply an odd-jobber, then this article is for you.
Step One: Know Your Baseline
When you have a steady paycheck and a predictable income, you budget by allocating spending categories within that limit. But those with unpredictable incomes must work “backward”—starting with the amount of money you’ll spend to figure out how much you need. If your income is unstable, then it is your expenditures that must be stable, predictable and repeatable.
According to the 50/20/30 rule, there are three categories of expenditures: essentials, priorities and lifestyle. Your baseline expenditures are those in the essentials category—those that must be paid every month, without which you can’t live. The first costs you’ll want to estimate are:
For your baseline, include the lowest food cost that is reasonable for your circumstances. Plan your grocery expenditures without any extras, like restaurants, coffee shops (unless you must use them to have business meetings or to avoid paying for internet at home), wine or fast-food pit stops. If you’ll be couponing and cutting back your food costs, take that into account, but if you know you won’t clip a single square, be realistic about your cost estimates. One of the best ways to get an estimate is to track your spending for at least a few weeks to get an idea of how and where you spend.
2. Housing and Utilities
For almost everyone, essential expenses include rent or mortgage. If you’re responsible for either, or if you house-share, live for free or have a sliding rent arrangement, include your minimum monthly housing cost in your baseline. Make sure to include the monthly amount for homeowner’s insurance and property tax bills in your total.
Those with unpredictable incomes must work “backward” to budget—starting with the amount of money you’ll spend to figure out how much you need.
If you live in a geographic region in which heating or air-conditioning is a life essential, include these average monthly bills in your baseline. In moderate regions, utility costs are a lifestyle choice—but heat isn’t optional in January in Vermont.
The same goes for internet and phone costs: If you work from home, they’re most likely a necessity, and should be included in your housing and utility estimate.
3. Medical Costs
A note about health insurance: The number-one reason people go bankrupt is because of medical costs, so it could not be more important that you have some form of health insurance. You should include these costs in your baseline estimate, as well as payments for any outstanding medical bills.
Do you need to include transportation to work in your baseline? Consider the lowest possible transportation cost given your job or jobs. Do you absolutely need a car, car loan payments, auto insurance, maintenance, garaging costs and gas expenses? Or is there great public transportation in your city? Can you walk to work? Telecommute? Can you infrequently taxi, Uber, ride-share, Zipcar or call for delivery? Again: Be realistic with your estimate. If you’re actually going to drive your SUV alone, round-trip, every day, factor that into the costs.
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Add up the baseline numbers, and you have the amount of the monthly “paycheck” you’ll write to yourself.