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Small Business Tips

How to budget with unsteady income

Manasa Reddigari

Budgeting is tight even when you have a steady paycheck twice a month. These tips will help you budget with unsteady income.

Make a conservative estimate of income

You'll need to estimate both your income and expenses to budget with irregular income. Start with your monthly income. If you're not sure how much you'll bring in each month, it's better to underestimate than overestimate your income. If you've only been in the self-employment game for a year or less, you can use the amount you earned in your lowest-paid month within the last year as your monthly income estimate.

Alternatively, if you've had unsteady income for a few years, you can also set your monthly income estimate as the average monthly income you've brought in over the months you've been in business.

Factor in both fixed and variable expenses

You'll also need to determine essential and discretionary costs before you budget with unsteady income. Write out all essential expenses first, breaking them down into fixed and variable expenses.

Fixed expenses are essential expenses that remain the same each month (e.g., mortgage payments). Variable expenditures vary from month to month and include necessary expenses (e.g., taxes, utilities), goal-oriented savings (e.g., retirement contributions) and purely discretionary outlays (e.g., funds for personal travel, dining or entertainment).

If you're not sure how much you spend on variable expenses each month, track these expenditures over three or more months and use the average monthly expense figures when budgeting.

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Try the 50-20-30 budget method

Once you figure out your income and expenses, determine your take-home pay and how to allocate it. Entrepreneurs who budget with unsteady income should consider the 50-20-30 budget. This budgeting approach divides spending into three categories: needs, savings and wants. The goal is to allocate 50 percent of your take-home pay toward fixed expenses, 20 percent toward savings, debt and retirement investments and 30 percent toward other variable costs.

Use the half-payment method of debt repayment

With the half-payment debt repayment plan, you make partial payments on your debt every two weeks. Indeed, 26 payments per year work out better than a single sum each month. This schedule amounts to two moderate payments or one full payment more each year, which means you pay down your debt faster without your wallet even noticing.

Maintain an emergency fund

40 percent of Americans can't cover a $400 emergency expense, according to a Federal Reserve report. Having an emergency fund is all the more important when your income is irregular as you may not otherwise have the financial cushion you need to pay for the unexpected expense. Thus, it's helpful to include an emergency savings contribution in the savings category of spending if you're using the 50-20-30 budget rule.

Curtail your credit card spending

Credit cards make it easy to spend money you don't have and can pose a real danger to those who need to budget with irregular income. Debit cards provide an excellent alternative to credit cards as they draw from a pool of money you already have. And they still retain the convenience of a swipeable card that doesn't require you to carry cash.

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