Guest Post by Jeff Hallada
Working from home definitely has its perks: staying in your PJs all day, making your own schedule and avoiding a grueling daily commute. But unfortunately, it’s not all sunshine and roses. When you work from home as a freelancer or contract worker, you don’t have a financial safety net like a steady, salaried job provides. Instead, your income can fluctuate — sometimes wildly — from month to month.
Uncertainty about your income can result in a truckload of stress. After all, you’re never quite sure if you’ll be able to meet all your expenses. While it’s impossible to consult a crystal ball and see exactly what you’ll make each month, here are some steps to incorporate into your budget to offer some financial cushion should the need arise.
1. Establish a Savings and Checking Account
For best results, if you don’t already have a savings and checking account, you’ll want to open both and link them for convenience. You can even get free money just for opening an account. You’ll routinely deposit all of your income into your savings account. Then, you’ll transfer the amount you’ll need for all your expenses that month into your checking account.
This strategy will leave some money in your savings each time, so your balance will build over time. Then, during months when your income is low, you’ll have a way to cover all of your expenses.
2. Determine Your Essential Expenses
Sit down and make a list of all of your essential expenses, which will make up your budget. These expenses should be ones that you must be able to pay for — no matter what. Think rent or mortgage, car payment, student loans, utilities, phone service and groceries. Look at past bank statements and credit card bills to ensure you don’t miss anything.
Depending on your situation, you may also need to cover other essential expenses. For example, if you work from home, you may need internet service. If you have health issues that require expensive medications or frequent doctor’s appointments, you may need health insurance.
3. Determine Your Non-Essential Expenses
Now that you know what you need for essential expenses, it’s time to make a list of non-essential ones. Non-essential expenses are for things you enjoy but don’t absolutely have to have.
Eating out, new clothing, electronics, TV streaming services and subscription boxes all fall in this category. Look at the past few months of bank statements to see how much you spend on such purchases — including money you withdrew from the ATM for personal spending — to get an idea of how much you should budget.
4. Determine How Much Money in Total You’ll Need Each Month
To determine how much money in total you’ll need each month, add your essential expenses and your non-essential expenses together and record the amount.
You can also write down the total amount it would take to cover only your essential expenses. Known as a bare-bones budget, this figure can be helpful to know if you’re anticipating a particularly low-income month and you need to eliminate your non-essential expenses.
With your total figure in mind, plan to deposit the amount you need to pay your expenses into your checking account each month while leaving the surplus, if any, in savings.
5. Always Take Advantage of Opportunities to Save on Expenses
Failing to seek out opportunities to save on your expenses is one of the biggest budgeting mistakes you can make. Make it a priority to save as much you can whenever you pay bills or make purchases.
To start, think about how you can minimize your fixed expenses, such as your rent and car payment. Could you make plans to move to a cheaper apartment? Do you really need a full-size SUV when you only have a family of three?
Then, think about everyday expenses, such as groceries. When grocery shopping, stick to a strict budget, choose lower-cost generic brands, avoid convenience foods and plan meals that are healthy, yet don’t require expensive ingredients. Also, install a grocery rebate app on your phone or go old-school and clip coupons to save extra money.
6. Transfer Funds From Your Savings As Needed
During months when you don’t make enough income to cover your expenses, you can transfer funds from your savings to your checking. The savings balance is the leftover money you have from months when you’ve made more than what you need to cover your expenses.
If transferring funds becomes a habit, though, you’ll never have the chance to build up your savings so it can fund a large emergency expense, such as a car repair or a medical bill, if needed. Experts recommend building an emergency fund equal to three to nine months of expenses. But when you have a fluctuating income, you may want to aim for at least 12 months.
7. Cut Your Non-Essential Expenses As Needed
As unappealing as it sounds, be prepared to cut your non-essential expenses, such as dining out, shoe shopping, specialty drink runs, massages, pedicures and expensive subscriptions.
For example, if you have a satellite TV subscription, you could be paying from less than $50 to over $150 per month, according to research from Statista. Be aware that you may have to pay an early termination fee if you cancel your satellite service contract before it’s up, however.
Fortunately, there are much cheaper TV-viewing options out there, such as Hulu, which currently has plans starting at $5.99 per month. Another option is to temporarily suspend your satellite service, which will allow you to avoid expensive fees for a small charge per month.
8. Comparison Shop on Current Services
Consider what you pay your cellphone service provider and car insurance company. You may be able to save up to hundreds of dollars per year on your cellphone bill by asking for a discount or switching to a smaller carrier.
To get a better car insurance rate, you can ask about discounts with your current provider, increase your deductible or shop for a better rate with another provider. Make sure you aren’t paying for coverage you don’t need. You may even want to consider insurance that is charged per mile you drive if you don’t drive much.
9. Budget for Taxes and Retirement
When you’re self-employed, you’ll need to budget for self-employment taxes, or you could owe hundreds or thousands of dollars come tax time. The current self-employment tax rate, according to the IRS, is 15.3% of your income. If you will owe $1,000 or more in self-employment taxes for the year, the IRS generally requires you to file estimated taxes each quarter instead of paying one lump sum come tax time.
It’s understandable if you’re living on a tight budget that you might want to hold off on saving for retirement. But the sooner you get started, the more quickly you can build funds. Set up automatic transfers from your savings account to your retirement account for best results. Every six months to a year, consider increasing your contribution amount to build your nest egg faster. And when you receive extra money, such as a tax refund or inheritance, consider adding at least part of it to your retirement fund.
Preparation Is Key When Your Income Fluctuates
Although trying to budget on a fluctuating work-from-home income is more difficult than if you had the benefit of a steady, reliable income, it can be done. The key is to plan ahead, look for ways to save on expenses and spend conservatively. Finally, when you have extra money, opt to save it all rather than spend it — at least until you build up a substantial emergency fund.