Hello YNABers. My name is Jesse Mecham and this is podcast number 85 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.
I received an email from Brett a little bit ago, a week or so ago, and he was asking me specifically how YNAB can… let’s see what it is. “How to use YNAB as a freelancer where my monthly income is not fixed.” And he says, “I have some fixed expenses and can create a budget based on those and variable costs, but do you have a recommended workflow for budgeting for a fluctuating income?” Yes, I do.
When I first built YNAB that was on a variable income. Not wildly variable, as some freelancers are, but it was variable nonetheless. And I saw that it did not work to predict income, because it was always wrong and you would spend all this time going down to the penny – especially at that time because we were so broke. I’d spend all that time basically balancing things and following Rule One and giving every dollar a job, and then the amount that you guess was wrong. And the amount that you guess is ALWAYS, always wrong.
So, what I would recommend first for freelance variable income situations, or even those on salary, is just budget the money you have on hand. So any time new money comes into your life – as our teachers always say in our classes – ask yourself what does that money have to do before you’re paid again. And you may not know when you are paid again, but you still will know what the money needs to do. Everyone has a really good sense of the next most important thing. There’s always a lot of clarity there. “Okay, I just got paid. What do I do?” They can answer that question. And I imagine that Brett here could, any other person in that situation, they can answer that very easily. “Oh yes, I’ve got to pay the rent,” or, “I’ve got to pay… I’ve got to buy gas and fill up the car,” whatever.
So, when on a variable income – or not – always just budget the money you have on hand. Don’t worry about forecasting far, far out into the future – it will just be changed and the only thing it maybe does is give you a warm fuzzy about “look how things could be”. But it is not how things WILL be, and we focus more on reality and on the here and now. By here and now I mean within 30 days or so.
Of course, I’m going to contradict myself now because you will look far ahead when thinking about your expenses. So, with income, conservatively, you deal with just what you have on hand. With expenses, you look far into the future and start saying, “Okay, how will I deal with those bigger expenses?” And Brett mentioned that he had some fixed expenses but he also has, I’m sure, as we all do, some Rule Two rainy day expenses where they’re larger and less frequent than his normal monthly expenses – like Christmas or an anniversary or property taxes or summer camps for the kids, whatever it may be. They come up every once in a while and they’re fairly large, or at least larger than normal. And if you don’t plan for them, then you will have a problem.
This is where freelancers and any of those people on variable incomes really run into trouble. And they run into trouble when they get a large inflow, not when they’re just barely making ends meet. For a freelancer that’s barely making ends meet, at least they know, “Hey, I’m barely making ends meet.” What’s scary is the freelancer that has a big windfall and then doesn’t use that windfall appropriately. By windfall I mean better than a normal month or whatever. So, you have this real estate agent that closes on several houses all at once and then has this big windfall – all this money comes in at one time – and they don’t allocate the surplus money appropriately. And allocating the surplus for freelancers is really where you can make a big impact and even out your cash flow.
I was at the pool picking up the kids from swimming lessons a week ago, and over in the kiddie pool they have this big playground area, and at the top they had… well, water would be piped up and then would pour out into this bucket. And the bucket was set up so that as soon as the water was full it would tip over and pour into the next bucket, fill it back up and water would begin pouring into that bucket again. Once the second bucket was full it would tip over, and so pretty soon you had all the buckets pouring water into the next bucket down. And I was thinking a lot about Brett’s question where he was basically saying, “Here’s my variable income – what do I do?” and it’s a lot like that. You have lean months and you have big surplus months. And you want to always have your priorities straight.
So, if I were organizing my categories in YNAB, I would organize them according to priority. I would say, “Well, I have to eat, we have to have shelter, we have to keep the lights on,” those types of things – those bare necessities. Those would be at the top of my list so that when I made very little money or made a lot of money, I would make sure those were taken care of. Then you would just simply move down the list in YNAB until your surplus ran out. If you didn’t have a lot of money, at least you would know that your bases were covered.
Just to recap a little bit, and then we’ll wrap up:
1. Only budget money you have. Do not predict your variable income – you will be wrong every time.
2. Look ahead and foresee your rainy day expenses, so you recognize that your expenses are greater than you think they are. They’re not all monthly and there’s a bump to your actual monthly expenses – or call them your true expenses – when you factor in larger, less frequent expenses. So make sure those are all set up as categories as well.
3. Prioritize those categories from necessities all the way down to “nice to haves”. As big surplus months happen, you fill up those categories that maybe have to be skipped once or twice or three months in a row perhaps.
One other thing really quick: if you’re having lean months for quite a while and then you have a surplus month, you may even be in a situation where you want to pad your necessities more, where you say, “Man, I don’t even know if next month I’m going to make enough to cover those. So in this surplus month I’m going to take some of that and shove it off into next month and use it there.” That’s one last thing to consider. It’s kind of focused on the freelancer, but a lot of us have variable incomes so I hope you get some mileage out of it.
Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.