This is a guest post from Emily and Etan at Fantastic Wagon – a resource for small business owners and dreamers.
I’ve always had big dreams for my entrepreneurial endeavors. For many years, I was building a company and living on savings and side income. Sometimes I’d earn a big chunk of money at a once, while other times, months went by without a single cent coming in.
Money felt pretty meager and out of control, but I didn’t mind because I thought of my financial situation as temporary. I felt like my personal finances just needed to tide me over until my business grew.
It was hard enough dealing with this kind of feast-or-famine income, but what made it even tougher was that I didn’t have a good sense of where my money was going. I justified spending by declaring “you have to spend money to make money” but I always had the sinking sensation that I might not have enough.
I told myself that I couldn’t budget because I didn’t have any money and that I was spending as little as possible while I grew my business, so the spending couldn’t really be shifted. I felt trapped.
Through a lot of trial and error and by using YNAB, I’ve started to relate to money in a different way. Now I track my expenses, have a monthly money meeting, am relentless about staying out of debt, and have plenty of money allocated for the things I care most about. As part of this shift, I’ve paid off $20,000 in debt, and created a strong enough financial situation that I can pursue my “side business” full-time.
My best tips for staying financially steady when your income varies:
#1: Set a Zero-Based Budget (Even if You Don’t Know Where to Start)
YNAB operates on a “zero-based budget” (you spend exactly the amount of income assigned to that month), which when you have a set salary, is simple. You know how much you earn each month, so you make choices to keep your spending within that. The problem for people with feast or famine incomes is that our income doesn’t feel like a finite amount. Because the amount we’re getting is uncertain, we don’t know where to start and we don’t make crucial tradeoff decisions with our money.
The trick that I’ve learned is to set your monthly “income” amount intentionally, and keep your expenses to that number, even if it means inventing it. The two best ways to get to this number are: 1) calculate your net income from last year and divide by twelve or 2) use your bare minimum expenses plus your monthly piece of the non-essentials (more on this below).
#2: Cut Your Expenses
And you might have to be kind of brutal about it. If your income is feast or famine, you will benefit immensely from having your monthly expenses more closely match your “famine” income than your “feast” income. For a while, I had to make some pretty big lifestyle changes so that my monthly baseline wasn’t consistently higher than what I was earning. I never regretted it for one second.
#3: Don’t Spend Windfalls
It will be super tempting, but do not spend windfalls. It will feel like you deserve it or like you’ve finally “made it,” but do not spend windfalls. When people have predictable incomes and they get a tax refund or gift, they can often justify spending that ‘extra’ money. For people with unpredictable incomes, it’s important to squirrel away the excess so that you can be prepared in lean months. This is really the key to balancing out the swings: save everything you can. Your future self will be so grateful.
#4: Budget For Things That Aren’t Necessities
Things that we deem as ‘second tier’ priorities such as haircuts, clothes and gifts do get spent on, to some degree, no matter what our budget says. Because they are almost-necessities. So the only question is whether we account for that expense (averaged over the months) or not.
By allotting a small, doable amount each month and allowing that ‘budget’ to accumulate month-to-month in YNAB, you can spend on these categories without digging yourself into a hole. For instance, my partner Etan isn’t too into clothes but he still needs sneakers from time to time. Even with his tight budget, he sets aside $10-20 a month so that he can easily buy a new pair of sneakers when his pair begins letting in the elements. And—thanks to the budget—all without having an existential crisis.
I used to think that dealing with my personal finances would be a distraction from my work. But I’ve learned that careful attention to my money can give me more freedom to pursue the work and life I love. Budgeting allows me to make decisions about the money I have from a place of abundance and intentionality.