How to create a budget on a fluctuating income - WMDT 47 News - Delmarva's Choice

By Andrew Housser

When it comes to creating a safety net to stay out of debt, budgeting and saving are the two secrets to success. But for the 15.3 million Americans who are self-employed in the United States, many of whom lack a consistent income, budgeting becomes a greater challenge. In addition, with the economic turmoil of recent years, many more people have a fluctuating income due to inconsistent, seasonal or part-time employment, and they also face hurdles in creating budgets.

Individuals with varying income need to adopt a longer-term view of finances than those with regular paychecks coming in each week or month. Earners with irregular incomes can establish a routine financial plan with these tips:

1) Find your average.

Generally, after even a few months, people can observe trends in their income. After a few years, annual patterns might become clear -- a slump around the holidays or in the summer, for instance. Keep track of these variations to determine your typical monthly minimum income. Then you can budget, spend and save with that "base" in mind.

2) Set a goal and save for it.

Decide how much you need to save to provide a necessary "cushion" for predictable and unpredictable expenses. For example, most self-employed people must pay quarterly estimated income taxes. Additionally, set a target to save an amount equal to at least six months' living expenses in an emergency fund. To meet your goal, commit to putting a certain amount or percentage in a savings account each month. You can pull from this emergency fund during leaner times, and replenish it when income increases.

3) Stick to a percent.

One reliable way to save -- especially for goals like tax payments and retirement savings -- is to commit to a percentage. Whenever you receive income, set aside a pre-determined percentage. By transferring this amount into a savings account as soon as you receive the payment, you can mimic the automatic savings deposits that help many workers with traditional paychecks.

4) Sock away windfalls.

When you earn or receive extra money (from a larger client check, a gift or activities such as a yard sale), save the excess. Once you are used to living on your budget, chances are good you'll actually feel more comfortable if you stick to that budget. If you stash the "extra" -- in addition to the regular pre-determined amount -- you'll see your savings soar.

5) Bill yourself.

Many financial institutions allow you to set up automatic withdrawal from your checking account to a savings account. Record this expense like a bill every month to painlessly accumulate savings. If necessary, start with a small amount like $25 or $50 per month and increase it whenever possible. For instance, if you paid off a credit card that had a $50 monthly payment, increase your savings by that $50.

6) Save like a pro.

Don't just keep savings in your spending account with a mental note that they're "saved." Instead, put them in an investment or savings vehicle. If you don't want savings tied up for the long term, you might choose a money market account that allows withdrawals only at certain minimum levels. If you're worried you might yield to temptation and raid your savings, buy short-term CDs (3- or 6-month terms) that provide some interest earnings without tying up the money for an uncomfortably long time. When the 3 or 6 months on the CD are up, keep reinvesting for another 3- or 6-month term.

7) Above all, avoid debt.

People whose income varies must be even more cautious than others about taking on debt. It is very important to remember that what seems like a reasonable debt load can quickly become unmanageable if your income drops below expected levels. Make sure to take into account your income fluctuations when taking on any loan commitments, and never run up credit card balances that you cannot pay in full at the end of the month.

When you have an income that varies, what matters most is that you devise a plan that takes into account the fluctuations in that income. Create an appropriate budget, save to build up an emergency fund, and avoid taking on debt -- and you will be able to reduce the stresses of fluctuating income greatly.