One of the most common questions Lib and I get asked on the Money Makeover is from people earning an irregular income.
We’ve had self-employed tradies, small business owners, contractors and even a sheep shearer complete the course, and they all want to know the same thing; how on earth can I budget if I don’t know how much money I’ve got coming in each month?
“How on earth can I budget if I don’t know how much money I’ve got coming in?”
Firstly, having been small business owners ourselves for the best part of thirty years we know exactly how you feel.
It’s tough worrying about whether you’ll be able to earn enough this month to cover expenses, especially compared to the safety net a salary provides.
But our answer to this question is always the same… budgeting and financial discipline is more important than ever when you have an irregular income.
We sat down with financial planner Claire Mackay, a Money Makeover expert and Principal of Quantum Financial, to ask her what she tells her clients in the same situation.
According to Claire, “when there are ups and downs in your income, the key is to have a good understanding of what your essential costs are over the course of the year. And when you have a good month, you need to be putting money aside to cover them”.
Makes sense. For example, you know your car rego and insurance all come in one hit, so regularly putting aside money throughout the year to cover them when they eventually fall due will take the stress off.
Claire says planning for both lean months on income and expensive months you know are coming will help you manage cashflow much more effectively.
One option Lib and I have always advocated is to build up an emergency fund (or as my somewhat crude former colleague used to call it… “f-off money”).
The key with an emergency fund, as Lib has always reminded me, is when you put money from your budget into separate compartments you have to be very self-disciplined to actually keep it there.
Opening a separate high interest savings account or term deposit which isn’t linked to a debit card is a good way to help your emergency fund stay on track.
So to sum up, an irregular income doesn’t mean you can’t budget. It means you have to.
- Work out your expenses a year in advance, including known big ticket items like holidays.
- Set aside money in the good months to cover known expenses.
- Start an emergency fund to cover you against the unexpected.