Personal finance and budgeting for solopreneurs can be tricky. Most of the advice out there about budgeting presumes regular paychecks and stability. “Side hustle” income is often relegated to the “extra income” category, where it serves as a nice boost to the income from a traditional 9-5 job.
But as more and more people make the shift toward becoming their own boss, it becomes that much more important to talk about how best to handle personal finance when income is variable.
This article is for you if you have high seasons and dry spells in your business. Or if you aren’t always able to predict exactly what next month’s or next year’s revenue or business expenses will be. And especially if you would love to be able to benefit from having a budget, but are just unsure how to make it all work with such an unpredictable income.
Here are steps you can take to mitigate against some of that variability in your income so that you can budget with more confidence and ease.
Step 1: Build a one month cushion
One of the first steps you can take if you are dealing with variable income is to build a one-month cushion into your budget. If you have been living paycheck to paycheck, it might take a while to get there, but try setting aside a little bit each month until you build up the equivalent of one month of personal expenses. Having this cushion, even if you don’t do any of the other steps below, will give you so much greater peace of mind.
Step 2: Budget with last month’s income
Once you have your one-month buffer in place, you can start adding a bit more predictability into your budget. One method is to use last month’s income for this month’s budget.
That way, you’ll never be stressed wondering whether you’ll pull in enough income before a particular set of bills are due. You won’t be wondering whether you actually can afford XYZ this week or whether you ought to save that money in case next week’s income is less.
This doesn’t eliminate the variation in your income, of course, but it does help you feel more in control.
Step 3: Expand your emergency fund
Once you have that one-month buffer and are using it to budget based on your previous month’s income, it’s time to focus on your emergency fund.
Having a chunk of money that you have stashed away for an emergency is of course also important for those with regular, predictable incomes. But it’s even MORE important for those of us with variable incomes.
On a basic level, your emergency fund protects you against going into debt if your car breaks down, your home needs repairs, or you suddenly can’t work for a while. For those of us with variable incomes, the emergency fund also serves as a valuable rainy day fund for those months when we just aren’t able to bring in enough money.
A standard piece of advice is to have a 3-6 month emergency fund if you have a stable job. If you lose that job, you may need that amount of time to find another.
For variable income earners, it may make sense to shoot for 6-9 months of expenses in the emergency fund. Or possibly 12 months if your income is even less stable.
Of course, any time you drain through your one-month buffer and start dipping into your emergency fund, your first priority should be to refill those two accounts.
Step 4: Start sinking funds and drip funds
Once you have your emergency fund started (even if it’s not fully funded yet), it’s time to give yourself another layer of dependability in your finances. To further counteract the variability in your income, you will want to start several different sinking funds and drip accounts.
Basically, a sinking fund consists of money that you set aside little by little so that it is ready when you need it. You might set aside a certain amount each month for holiday spending or for that car repair that you know is coming eventually.
With variable income, you might not be able to set aside the same amounts month after month. But on higher income months, you can set aside more. On lower income months, you might pass on adding to these funds.
When the time comes to use the money in your sinking funds, you can spend it guilt free.
A drip account is similar to a sinking fund, but with a slight difference in how the money gets used. Like in a sinking fund, you’d regularly be setting aside money, sometimes more, sometimes less, for a designated purpose. But in using the money, you’d give yourself a reasonable spending limit for the month.
For example, you might create a drip account for groceries. On your good months, you might be able to throw a significant amount of money into your groceries account. But that doesn’t mean you can spend it all guilt-free the next week at the grocery store since this money will also have to tide you over during the low income months. So you’d give yourself a reasonable weekly or monthly grocery budget to make sure your spending is intentional.
Extra tip: Use Profit First
Another way to make your irregular income more regular is to know your business finances so thoroughly that you are confident in projecting how much your business needs to set aside for expenses and how much you can afford to pay yourself. Especially once your business has built up its own rainy day fund to cover some of those lower months, you’ll then be able to pay yourself a regular and predictable “paycheck.”
Profit First is the method I use for my income as a private LSAT and SAT/ACT tutor. It has allowed me to pay myself a steady income even during the slow season and even when life events like moving or hospitalizations disrupt my earning during a particular month. (See how I use Profit First and our personal family budget.)
Essentially, the benefit of using Profit First to deal with your variable income is that you’re simply placing the burden of dealing with the variability onto your business. Your personal income then becomes fixed and predictable.
Budgeting on a variable income doesn’t have to be a nerve-racking process in which you bite your nails waiting to see if your income will cover all of your personal expenses this month or not. If you take the steps above to mitigate some of the irregularity, you’ll find that it’s possible to budget on a variable income with confidence, even during the slow months.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.