Budgeting is hard enough for some without the added financial strain of irregular paychecks, but this is the reality for many families. Small business owners have a fairly irregular income because they may be dependent on sales revenue, or their business may be seasonal. Those who work on contract, or even freelancers, all have to learn how to smooth out their income streams so that they can cover their expenses and live without the fear of being short on cash.
The following tips will help you to do just that.
1. Calculate your monthly expenses. You must know exactly what you can expect if you are to prepare for the future. Look at your bank statements or receipts for the last three to six months and categorize your expenses over the period. You should be able to find an average figure for your expenses, and it is wise to round up to take care of any slight increases.
2. Find your income figure. The next step is to calculate your income for the same period. You should also make a note of how often you got paid over the period as well. This will help you to highlight a payment trend in the future. You may not see a trend in how you are paid immediately, but it is good practice to compare year on year, as this will help you to see if your business is seasonal, and then you can schedule in even greater detail in the future.
3. Open a holding account. If you have not opened a separate business account as yet, you should do this now. Having a holding account through which all your income is passed helps you to track your annual income easily as it is all in one place. It also helps you to stick to a budget as you have physically separated your income from what is available to spend.
4. Pay yourself. Your paycheck should be the minimum that you can possibly live on, taking into consideration all your rounded-up expenses from transportation to food and rent or mortgage.
5. Create a buffer account. After a three month or even six month period, depending on what you used at the beginning, you can transfer the residual into another account. This should be a high interest earning account and this can be used as savings.
6. Give yourself a raise. At some point you should cut yourself some slack. You can think of it as a bonus for all the discipline and hard work of managing your finances; a good milestone might be one year after starting the exercise. Of course you shouldn’t double your paycheck unless your income has actually doubled, but allow yourself some reward for the sacrifice you have made.
Unfortunately, although income streams are sometimes irregular, expenses and other financial commitments generally don’t let up while you wait around for the next paycheck. Luckily, there are steps you can take to avoid getting caught between paychecks without enough left over to cover the bills. The tips provided will help you not only to be on top of your expenses, but eventually you should also be able to put some aside for savings
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