Creating a budget may be the first step toward effective financial planning, but how do you budget when you are not sure how much income you will earn at the end of the month? If you work independently or have started a small business, you are well aware of the difficulties of budgeting based on volatile or unpredictable income.
If you’re self-employed, the budgeting process will require a different approach, but the ground rules should be clear and straightforward once you’ve established them.
1. Start with what you know
If your income is variable, you first need to focus on fixed expenses. Ask yourself what net basic amount you will need for the necessities of life, i.e., rent, bills, transportation, and food. Look carefully at your budget sheet and calculate your basic cost of living. Add savings, insurance, and debt repayment if possible, as these are also essential.
Then take a closer, in-depth look at other expenses, such as leisure and entertainment expenses. Are you subscribed to an app and forgot about it? Do you need to set aside some money to go out and meet your potential colleagues/clients? To what extent can you reduce it? This may be the hardest part, as this is where expenses can add up. Keep all of this in mind before adding it up to arrive at your basic expense amount.
2. Spend last month’s income
This may be the most important part of planning. The best way to ensure a healthy financial future with an unstable income is to avoid spending all of your income on expenses. Now that you’ve identified your basic expenses, set that amount aside to pay next month’s bills. The income you earn this month should be used for future planning, including savings and investments.
3. Zero-based budgeting
This budgeting method is very suitable, especially for those with irregular incomes. Zero-based budgeting ensures that every dirham you earn is allocated to a specific spending category so that no part of your income is wasted on reckless or reckless spending.
The positive side of irregular income remains the increase in income in some months. If you’re wondering how to get the most out of your money in the months when you’re spending more than your basic expenses, a zero-sum budget might be the answer.
The starting point, as explained in the paragraph above, should be to use the previous month’s income for basic expenses. Now, allocate the money you’ve earned for a purpose, such as next month’s budget, short-, medium-, and long-term goal accounts, and retirement and investments. Do your calculations without excluding any amount so that you do not miss anything.
4. When in doubt, save!
Creating an Emergency Money Fund ensures you protect your financial future by setting aside a well-funded emergency fund to support you in the event of unexpected events, such as expenses. sudden medical. You’ll also need to set aside money for a debt fund to ensure you don’t put off expenses like home or car repairs for several months during months when your income is low.
5. Pay yourself a salary
If you are self-employed, you will be able to consider all profits as income. Therefore, as your business grows, you should pay yourself a fixed salary that includes all the benefits you will provide to future employees.
If it is difficult to determine its value now. You will be able to use the amount you wrote down for basic expenses as your salary. If you cannot afford to pay your salary, you will need to adjust your lifestyle. As we explained previously, everything above your salary should be allocated to create a zero-sum budget.
FAQ’s
1. I’m independent; my wages change every month. How do I build a budget that will suit me?
So first, list your essential expenses, such as rent, bills, transport costs, and food. Allocate an expense figure to cover your daily basic living necessities (savings, insurance, debt repayment, etc.). Next, scrutinize discretionary spending on leisure & entertainment, trimming what can be trimmed.
2. Why is it necessary for me to pay myself a salary? Since I’m self-employed,
A set salary in self-employment is a must for good money management. This makes it possible for you to treat profit from business activities as income, making financial planning a little easier as your business expands.
3. Living off a haphazard income: How can I ensure a healthy future financially?
One important strategy is not to spend all your money on expenditures. After you figure out what your total expenses are going to be, put aside that much money this month. With the money you make this month, your future has to be planned, including savings and investments.
4. What is zero-based budgeting, and what is its applicability to people with uneven income?
With zero-based budgeting, every dollar of any earned income goes to a particular spending category, so there are no cases of waste or reckless spending. For those with uncertain incomes, this is especially suitable. As the amount of income earned in a month increases, so does the amount that can be invested. Firstly, for next month’s budget, set aside funds for short-, medium-, and long-term goals, retirement, and investment needs.
5. As an independent existence; what can I do to set aside a financial cushion against the unforeseen?
Nothing is more important in preparation for emergencies than an “Emergency Money Fund.” To cover your needs should an unexpected emergency arise maybe a sudden family illness? withdraw from the emergency fund. In addition, set aside some cash for a debt fund. So even if you don’t make as much, you can still pay your bills.
6. There’s nobody to hold me accountable for income-what should I cloth myself do if my self-employed income can’t cover a fixed salary for me?
If it is no easy task to set a fixed salary, then you might as well take the amount calculated for necessities for your salary. If you really can’t afford it, deal with it one way or another. Modify your lifestyle. Anything over and above your salary must then be appropriately dispersed. You should adopt a zero-sum approach to budgeting to ensure thorough planning through a comprehensive combination of calculations and planning.