Managing personal finances can be challenging, especially with a fluctuating income (also called variable income). When your income changes every month, it can be harder to plan your spending, manage debt, and stay financially stable.
This challenge is common among the self-employed or Every Day Earners. Without a stable income, covering essential expenses and budgeting can be challenging. However, with the right strategy, it's possible to control your finances and achieve financial stability.
In this article, we'll explore strategies and practical tips for creating a budget that suits your financial situation and helps you reach your financial goals.
The importance of creating a budget with variable income
Regardless of your income type (variable or fixed), budgeting is essential for everyone. However, it's even more important for people with variable incomes, as budgeting helps you use your money wisely, control your spending, and plan for the future. With variable income, having a budget provides stability and ensures you can cover your essential expenses during months with lower income.
Fluctuations in income
In general, variable income tends to involve fluctuations, both expected and unexpected. It's important to plan and budget for these changes as effectively as possible. During months with higher income, avoid spending on unnecessary things and keep extra money in savings. In months with lower income, draw on your savings and prioritise essential expenses.
Managing irregular expenses
There are irregular expenses e.g school fees, etc, that can strain your budget. To manage them efficiently, you should estimate their annual cost and divide it by 12. Then, try to set aside a portion of your income each month specifically towards the expense. This way, you'll be prepared when expenses arise, and you won't have trouble keeping your budget on track.
Avoiding debt traps
When your income isn’t steady, it’s important to be careful about taking on debt you don’t really need. It's very important not to rely on loans to cover expenses during months with lower income. Instead, focus on building an emergency fund and managing your budget effectively. If you need to take out a loan, make sure you have a solid plan to repay it as quickly as possible.
Tip: Instead of high-interest loans that lead to traps, look for easily-accessible ones like M-KOPA digital loans which offer flexible payments that work with your income.
How to prepare a budget with fluctuating income
1. Analyse income and expenses
To create an effective budget with fluctuating income, start by taking a close look at how much you earn and spend. Review your income over the past few months or years and look for patterns or seasonal changes. Then estimate your average monthly income. Do the same with your spending so you can understand your habits and see where you might need to make adjustments.
If your income isn't consistent, your budget shouldn't be either. Here are two methods that can help:
a. Budget based on the "guaranteed minimum income":
- Calculate your lowest monthly income from the last six months.
- Use this amount as a basis to cover your essential expenses.
- When you earn more, put the extra money into savings or debt repayment.
b. Budget 60-30-10:
- 60% for basic needs (rent, food, transportation, minimum debts).
- 30% for savings and additional debt repayment.
- 10% for entertainment and extras.
If you have a month when you earn less, you can adjust your budget by cutting back on non-essential spending.
2. Prioritise fixed and essential expenses
You should allocate a specific portion of your income to cover fixed expenses e.g. food, electricity bills, transportation, debt repayments, etc. It’s advisable to do these first before allocating funds for other expenses. By prioritising fixed expenses, you'll maintain stability and avoid late fees or potential negative consequences.
Some fixed expenses can be reduced without significantly affecting your quality of life. Consider these options:
- Re-negotiate your rent where possible.
- Review your smartphone data plans and airtime.
- Buy foodstuff in bulk and take advantage of discounts.
- Use public transportation or share taxi rides with others.
Ensuring your fixed expenses are covered will allow you to focus on managing your variable income effectively.
3. Take seasonal expenses into account
Even with fluctuating income, you will still face seasonal expenses, such as Christmas preparations, school resumption expenses, or travel plans. Take note of these irregular expenses and save for them throughout the year. Plan ahead and set aside money to avoid financial strain when they arise.
4. Create an emergency fund
When your income is not fixed, having an emergency fund is important. An emergency fund acts as a safety net during months when income is lower than expected or unexpected expenses arise. Try to save enough to cover 3 - 6 months of living expenses in an easily accessible account. This fund will provide peace of mind and financial security during your lower income periods.
Next Step
Remember that a budget that accurately reflects your reality will help you achieve your goals and dreams, and staying organised with your money is the first step toward financial stability. So, grab a pen and paper and start that budget today.
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