Most budgeting starts with the assumption that you've got a steady paycheck and plan your spending around it. But what if your paychecks are anything but steady? Fluctuating incomes are a way of life for many as companies rely more heavily on freelancers, contingent workers and part-timers whose hours can be ramped up or reduced in response to changing demand. Even retirees are now more likely to see work opportunities come and go and investment income rise and fall. The result: Many of us are discovering what salespeople, artists and performers always have known: Planning is a lot tougher when you don't know how much income is in your future.
You can get the ball rolling by creating two worksheets — one for your sources of household income and the other for expenses. Assign each item to one of three categories, writing in the dollar amount. Categorize your income as Reasonably Secure (Social Security, a pension, a steady job), Likely (a recurring freelance gig) and Sporadic (everything else). Categorize your expenses as Rock Bottom (basic needs and contractual obligations like your mortgage and debt payments), Getting By (you'd really hate to give it up) and Comfortable (vacations and Starbucks).
If you have trouble remembering all your expenses, reviewing your credit card statements might help, as might keeping a record of everything you spend for a month or two. It's important not to overlook expenses that come around less frequently such as insurance premiums, car repairs and holiday spending. You can estimate those expenses and divide by 12 to save something toward them each month.
Put the two worksheets together and you can create a personalized spending road map. Your Rock Bottom expenses need to match up with your Reasonably Secure income (the preferred arrangement) or Reasonably Secure and Likely income combined. If your Rock Bottom expenses are higher than that, your focus needs to be on reducing them. One way to do that is to pay off debt, eliminating required payments. Another way is to acknowledge that some expenses aren't really necessities and belong in the Getting By category.
When spending money in good times, avoid saddling yourself with obligations that will increase your Rock Bottom expenses when times aren't so good. That means, for example, if you buy a new car when you've just gotten a big bonus, you need to either pay cash or put down enough that your monthly payments will fit within your Rock Bottom budget.
Use your expense worksheet to set spending priorities and create a running list of what needs to be paid when. Make sure the Rock Bottom expenses get taken care of first, with other items added as funds become available. Some people use a system of envelopes to earmark cash for future expenses.
Be sure to keep enough in your checking or money market account to cover at least a month's worth of expenses. The more erratic your income, the more you need to keep on hand. On top of that cash-flow account, it's vital to have an emergency fund to cover the unexpected, like home and car repairs or to tide you over if you were to lose your job. It might cover as little as three months' worth of expenses if you've got a working spouse or you have substantial secure income, but you should have six months' or more if you're on your own. Funds like that usually are built up gradually so don't worry if you're not there yet. Just make it a priority to get there and save a little toward it each time you're fortunate enough to have extra money.
Other things that might help:
• Stay on top of your tax liability and make quarterly payments or increase payroll withholding appropriately so you don't get stuck with a big tax bill.
• Avoid credit card debt. Don't run up bills expecting to be bailed out when times improve. Instead, save in advance for trips, car repairs, gifts or whatever else is on your agenda.
• Start putting money away for retirement while you are young, even if it's only a very small amount. The more years you have to save, the more compounding can work in your favor.
• If your work is at all seasonal, arrange to pay your insurance premiums and make discretionary payments such as charitable contributions at times when you're more likely to have money in your bank account.
Helen Huntley is former Times personal finance editor and currently a fee-only financial adviser with Holifield Huntley Financial Advisers in St. Petersburg (www.holifieldhuntley.com).