How to budget with an irregular income
11th May 2015
Pursuing self-employment really does have its benefits; being your own boss, flexibility and the opportunity to nurture and pursue a passion. However, something regular employees take for granted is that by the time pay-day arrives, the complicated finances are already taken care of.
With the freedom of self-employment comes the need to budget your finances responsibly. You aren't just caring for your company with your earnings but yourself and maybe your family home too! Keeping an eye on your in-goings, outgoings, tax deductions, VAT is hard enough, and harder still without a regular pay-check. This might be due to working to contract deadlines or finishing projects bi-monthly.
Since you’re reading this, you might be starting out as your own boss or perhaps you've already started but the numbers just aren't adding up - well not in a good way anyhow! With this in mind, we've put together some tips to help you budget with an irregular income.
Don’t spend it all at once!
Sometimes the best advice still rings true from childhood; remember blowing all of your pocket money on sweets in one go? Save yourself the financial toothache and earn that warm sense of financial security by holding back from splurging your hard-earned cash the moment it hits your bank account. We’re not saying it’s an easy task, sporadic large sums of money are a real test of self-discipline. However, when the money rolls in, you really can put it to good use if you know how!
1.Keep your in-goings and outgoings recorded
It’s important to keep a record of your in-goings and outgoings for a number of reasons; not only can you monitor your income but you can also track your spending habits - items that crop up regularly on your outgoings. Are there cheaper alternatives? Adjusting your spending for the smallest of items such as stationery or printing ink can make a difference.
2. Prioritise your payments
With your in-goings and expenditures under surveillance, you should now be able to prioritise your finances. Place them in order of importance starting with your absolutely essential spends. From here, you can work out what and who needs to be paid first. As you work your way down the list, you might even find there’s a few you can cut out completely and save yourself some pennies!
3. Budget for monthly expenditure
Be ruthless but remain realistic. Forget how much money you actually have, and work out how much you actually need. Working this out with a variable income can be tricky but for a start take your last year’s income and divide it by 12; you can then use this figure as a rough estimate for your monthly budget and also use this sum to work out how much you could save this year!
By rationing your income to provide enough for necessary living expenses, it’ll become clear pretty soon how far you can stretch your budget across a few months and maybe even up to a year. Write it all down, and remember to include the pesky monthly payments you might forget about like mobile phone bills and that Netflix subscription you keep forgetting to cancel… .
4. Use cash and leave the card at home
You've set a monthly budget - now stick to it! Freeze that piece of plastic, it only exists for one day a month and that is to withdraw your cash allowance for the month. Once it’s served it’s purpose, banish it away under lock and key! You need to trick your brain into thinking that this is all the money you have in the world for the next 30 days at least. It’s an excellent way to discipline yourself to make the most of your money. It also makes for less stress when sorting out your finances on paper, instead of trawling through a bank statement of small and frustratingly regular payments (coffee shop stops, fast food, retail therapy…).
5. Give yourself a regular wage
This is a good one if you like the idea of a regular monthly salary to coordinate your spending. To do so, try setting up two bank accounts. One to receive your lump sum of money (choose a bank account with a good interest rate!) and another to act as your current account. By simply setting up a monthly direct debit from one to the other, you've gained control of your irregular income. As an added bonus, you might just end up saving money. This is because whilst your income varies, your self-imposed salary will remain the same. So you can avoid spending too much when you have a particularly good month.
6. Save up for your taxes!
Our final tip is one we hold very close to our hearts here at RIFT Tax Refunds. Whether you choose to save for your taxes on a monthly basis or all-in-one go, it is an absolute must! It can be easy to kid yourself that you won’t have to part with any of your earnings but the best way to avoid a shock following Christmas festivities is to start saving early. Try saving monthly or if you’re income is too irregular, you could agree to put aside a percentage of each payment towards your due tax bill. You could also try using the HMRC Ready Reckoner Tool, it’s a nifty tool to help you work out how much you’ll need to be saving.
You might like to try setting up another account to keep your money towards tax separate from your actual earnings. Whether this means regular monthly payments into the account or on an irregular basis - we cannot stress enough the importance of saving a reasonably close estimate of your tax and to start saving ahead of time!
Try out these tips to budget better with an irregular income and reap all of the benefits found in self-employment!