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Managing Personal Finances with Inconsistent Income

If you are self-employed, or work on a commission basis, chances are you have to manage fixed bills on an inconsistent income stream. Managing your personal family budget can be a challenge, because most large bills, like insurance, mortgages, and automobile payments, have almost no variability. So, how can the self-employed manage their budget?

First, develop a monthly average income estimate. Depending on the type of inconsistent income you have, you may be able to approximate an average monthly low and high-income point. If your income is seasonal, for instance, landscaping, it would be more accurate to approximate a low and high-income point for each month. To do this, look back at prior earnings, and figure out if there’s any pattern to your income stream.  Do you make more in the summer months? Does your income depend on the weather? For snow plow drivers, for example, earnings depend heavily on the snowfall in a given year. Always estimate on the low side, so that you won’t be spending more than you make.

When developing your budget, first add in your fixed expenses, that don’t change from month to month, like your mortgage and insurance payments. Next, by month, add in the expenses that vary throughout the year, such as heating and electricity. Finally, for discretionary spending where you have some control over the expenses, budget to the lowest average month income amount. You may find that you have a few months where you are spending more than your income, but that’s acceptable if you aren’t overspending your income on an annual basis.

Following the budget can be tricky, especially in those months where you have a surplus. In order to make sure you don’t overspend your annual income, it’s essential that you save this surplus in a short-term, low-risk account, such as a money market account or a saving account. The saved surplus is likely to be needed in future months where your income is lower than average. 

An emergency fund is especially important for the self-employed in case you experience a major drop in income. When determining the amount you’ll need, estimate high so you’ll have a good cushion if necessary. Also, don’t forget to contribute to a retirement fund, which you can do on an annual basis once you know how much income you’ve received. Following these steps can make managing inconsistent income just a little bit easier.