If you are looking to keep your personal finances on track, budgeting must be a top priority. It is never easy to create and maintain an updated budget. Well, it is easier when you earn a regular source of income. At the end of each week or month, you definitely know how much you are taking home.
It is a different case when you earn a variable income. Freelancers, contractors, salespeople, or self-employed have one thing in common, their monthly income varies. There are good months, and then there are bad ones where you can possibly not meet your necessities.
Which makes budgeting on a variable income a tad bit more challenging. For instance, when I was in corporate, I knew how much I’d bring at the end of every month. And it had me in a comfort zone. Now, one year down the line, I am always looking at my budget and figuring out how I will survive when I don’t make much from my self-employment.
It is hard knowing the exact amount of income you will make every month. I have learned, though, that if I can estimate my monthly expenses, I am at least aware of how much I need to survive for the month. With that, I can work towards getting an income that matches my monthly needs, plus extra for saving and investing purposes.
Without further ado, here’s how you can join my bandwagon of budgeting on a variable income:
What’s your Non-Discretionary Spending?
Start by creating a budget baseline. Here’s where you add up all your spendings on necessities, including:
- House expenses – rent or mortgage payments
- Utilities – water, electricity, waste, phone, internet, and gas expenses
- Groceries – shopping on meals
- Transport – fuel or fare
- Taxes – yes, taxes must be part of this list. Try to estimate how much you owe in taxes from all the income you make and save this money. When the tax season comes, you can use the saved money to pay for taxes rather than borrowing or avoiding paying the tax for lack of funds. If possible, have a separate savings account for tax purposes.
- Insurance – health insurance, auto insurance, and home insurance. The premiums might be annual, but you can save a portion every month, making it easier for you to accumulate money for premiums over the year. Trust me; it is much easier than raising the whole lump sum when the payment is due. For example, if your annual health insurance premium is Ksh 30,000, you can set aside Ksh 2,500 every month for the next 12 months.
- Debt payments – personal loans, student loans, mobile loans, auto loans, or any loan you might have.
What’s Your Discretionary Spending?
This is where expenses like cable bills, entertainment expenses, subscriptions, clothing, among others, come in. These are hard to determine, especially if you have not been budgeting.
So, take your statement (bank, Mpesa, or credit cards) and look for any payments that do not cater to your necessities. How much do you spend on average? If it is more than you can handle, start looking for ways to reduce these costs. You never know; this money might pay your rent when a client delays your payment some months down the line.
And Your Average Income
You might be on a variable income, but if you can estimate your average income, you determine whether it is enough to cover your expenses. First, add up your income for the last year or the number of months you have been earning a variable income. Then, divide that amount by the number of months.
Does that number match what you need for your expenses, both discretionary and non-discretionary? If not, you probably need to start lowering your expenses or find a way to make more income.
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Don’t Forget to Save
Now that you have your necessities sorted and set aside some money for your discretionary expenses, put some money into a savings account. But, first, ensure you have an emergency fund. You are advised to have at least 3 months of your expenses but let’s make that 6 to 12 months if possible.
Read more on Building an Emergency Fund and Why It’s Important
Second, and what I would insist on, don’t forget your retirement kitty. Here’s what many people on a variable income do not realize; you might not use that money at the moment, and your retirement seems like it’ll take forever to get here. However, if you set some money aside in an approved retirement fund, you will be saving for your retirement and lowering your present tax liability.
Case in point, KRA allows you a tax-deductible of up to Ksh 20,000 every month if you save in a retirement account. That’s Ksh 240,000 in a year. So, this month you make Ksh 100,000. Without deducting any expenses, your taxable income is Ksh 100,000. But, if you contribute Ksh 15,000 in a retirement fund, your taxable income reduces to Ksh 85,000.
Related post: Individual Pension Plan; Why You Need One
If you have other goals, like purchasing an asset or taking a vacation at the end of the year, have a savings account for these expenses.
During the months where you make more than you expected, ensure the extra money goes to a savings account or an investment.