How Much Time Do You Have?
On average, new budgeters save $600 by month two and more than $6,000 the first year! Pretty solid return on investment.
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By Google’s definition, a budget is “an estimate of income and expenditure for a set period of time.”
… and now that you’ve read it, I invite you to toss it from your memory. My beef with this “definition” is that it’s shortsighted. Sure, many of us can predict our income for a set period of time, most of the time. But what if you’re self-employed, work strictly on commission, or you’re a freelancer? Or what if you’re paid hourly and your schedule fluctuates? In these cases, you’re dealing with variable income, and your paydays may not be regular.
But, let’s make one thing clear: even if you have a variable income, you can still budget just as well as the next person. In fact, simply because your pay is irregular, you may find that you love your budget that much more—it’s the key to ensuring that you’ve got the money that you need, when you need it (and who doesn’t love that?).
Now, let’s take a look at how to make budgeting work for you.
If you’re not familiar with YNAB’s method, allow me to introduce you to the first rule of YNABing, a.k.a., Rule One, Give Every Dollar A Job.
It means just what it says. When you get paid, you need to decide what you’ll do with your money before you spend it. And the key words, here, are “when you get paid.”
This is a simple but powerful shift for most people who are inclined to forecast all of the income that they expect to receive for the month. But that’s just asking for trouble—what if it doesn’t show up? Do yourself a favor and only count on the money that you have right now.
When a new paycheck arrives, budget those dollars. Period. You’re only concerned about the dollars that are actually deposited safely into your bank account. You’ll deal with future income when the time is right (like, when it arrives, in the future).
If you don’t have enough money in the bank to fund your entire month, not to worry. This is where your priorities come into play. When you get paid, you’ll fund the categories in your budget that are the most pressing. The big question is, what do you need your money to do before you get paid, again?
Let’s say you have $500 in your bank account when you sit down to budget. After scanning your categories, you decide to give those dollars the following jobs:
Now that you’ve budgeted the $500, you can see exactly where you should spend that money. No eating out, no haircuts. You’ve got a plan, and it’s to pay a few bills, cover groceries and partially cover your $50 monthly bus pass. Done.
When you get paid, again, you can top off your bus pass category with the last $10 and prioritize the rest of your new dollars (but not until you have the money!). Once you’ve funded all of this month’s expenses, you can begin funding next month’s expenses. Budget as far ahead as your money will take you!
And, speaking of budgeting into the future, that’s where the magic is—especially when you’re on a variable income. At YNAB, we call it aging your money. The point of aging your money is to create a situation where you get paid and don’t need the money, yet, because you’re not done spending the money that you already have. (It feels as great as it sounds.)
The more money you accumulate, the more months ahead you’ll be able to budget for, and with all of your money assigned to specific jobs, the more stable your finances will be. Instead of seeing that one big number (your bank balance) and assuming that you have plenty of cash to spare, you’ll see that—using our example from above—you have $80 to spend at the grocery store. The rest of your cash is tied up doing important jobs.
We’re all susceptible to job loss, whether we earn a variable income or a very, very regular income. It’s just part of life, and it’s why aging your money is so important. It’s a cushion, and it’ll buy you time while you secure a new job.
The same principle applies to the lean times that you face when living on a variable income. If you find yourself with an extra-long gap between paydays (or you don’t bring home as much cash as usual), then having money budgeted for the next several months will keep you afloat.
But, what if you face periods without income on a regular basis? For example, if you’re a school teacher, seasonal small business owner, or if you get furloughed for part of the year, then what? Then you definitely need a budget!
A budget will help you spread your income, evenly, across all twelve months so that you aren’t stuck with nothing when the checks stop showing up. All you have to do is determine how much you need to cover one month’s expenses. Now, any YNABer will tell you, there’s no such thing as a normal month. But, for a quick snapshot that approximates your monthly expenses, try setting up a budget template.
Once you’ve got your monthly number, create categories in your budget to save for those months when you don’t get paid. For example, if you’re a teacher and don’t receive income from June through August, you might set up a section in your budget like this:
Then create a “Category Balance by Date” goal for each of those months, and YNAB will calculate how much you need to put aside so that you’ll have enough during the summer. Warning: This could be quite an an eye-opener for the first year, depending on how many months you’re dealing with and how much time you’ve got. Next year will be easier.
And, of course, you may need to adjust your monthly budget to make room for that fact that the money you receive in a given month needs to cover your current expenses and your savings goals for the times when you won’t have paychecks.
So, can you budget with variable income? Absolutely! In fact, your budget is the key to making the best use of your inflows so that you’re never caught empty-handed. All you have to do is remember that your budget knows the real story (and never trust your bank balance!).
For more help, drop into our free, online class, You Can Budget with Any Pay Cycle. It’s free, it’s only 20 minutes long, and our teachers will provide a demonstration to help you understand these principles. And, bring your questions!
Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)
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