There are many advantages to not having a nine-to-five job, or indeed any job which sees you working a fixed number of hours per week. You might have more time to yourself, enjoy greater flexibility and sometimes even the luxury of being your own boss. The worst part, however, is the sometimes discomforting nature of an unstable or unpredictable income. Even if you are confident in always earning enough to accommodate for your lifestyle, budgeting becomes a nuisance when your income is continuously fluctuating based on variables such as performance, seasonal factors, consumer trends and pure chance.
Here are some tips on how to manage your bankroll with effective budgeting from successful people in a number of irregular-income professions.
J.D. Roth, Freelancer
A blogger for many years, and owner of Moneyboss.com; J.D Roth has a good deal of experience in budgeting and bankroll management. His tip for other freelancers? Be realistic in your budgeting and always account for a ‘worst-case wage’, thereby creating a safety net.
“When I project my cashflow, I base it on my minimum monthly income from the past twelve months. Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital,” he explains.
Your average monthly income might decline for a variety of reasons, so expecting it to be exactly the same as the previous year is dangerous and can lead to premature spending. Basing your yearly budget off your minimum monthly wage from the previous year forces you to budget according to a ‘worst case’ wage. This helps you deal with any nasty financial surprises or disappointments that might arise throughout the year, whilst also putting you in a better position to save money
Once you calculate your ‘monthly minimum’ from last year, J.D. Roth suggests having two separate bank accounts. One is your business account and one is your personal account. Your business account is where you receive all money earned throughout the month, and it is from this account you transfer the sum of your ‘monthly minimum’ into your personal account.
Think of your business account like the account of a company which pays you a monthly wage. This way, any extra money you earned above you ‘monthly minimum’ sits in your business account and accumulates interest. This method helps recreate the feeling of a stable income, whilst also providing you with an emergency fund, savings account, or end-of-year-bonus (how you percieve the money in your business account is up to you!)
Paul Wasicka, Poker Player
Poker is profession with one of the most unpredictable incomes of all – and therefore one of the most important in which to manage bankroll effectively. Professional poker players sometimes earn half of their annual income in just one week. Poker is also unique in that professionals have to spend money to make money. Paul Wasicka, whose main income derives from a mixture of online poker tournaments and live events, suggests the following;
“I fully recommend that you never commit more than 10% of your bankroll to an individual event or ring game. To be truly safe…limit your investment to between 2% and 5%.”
Knowing that you can survive a loss also helps your mentality and allows for better play and more success, Wasicka argues. “Because I don’t have as much of my bankroll invested in a tournament entry, I play the event without fear that I would be crippled if I failed to cash.”
When winning big in poker, it is understandably tempting to splash it all – which makes discipline in professional poker extremely important. Respect your bankroll. Keep tabs on how many hours you spend playing poker throughout the year, then divide your total earnings between those hours to get an idea of your ‘hourly rate’. If you win big, but then calculate that this win only accounts for a moderate figure per hour (considering all the hundreds of hours you have put into playing), then you’ll feel significantly less inclined to spend it all in one go. It will feel more like a much-needed payoff after hours of hard work, rather than a lucky big win.
Chris Lott, Sales
Chris Lott is a sales management expert and owner of LottSpace.com, with years of experience in commission-based sales jobs. For those starting out with no savings to their name, Lott suggests employing what he calls the A, B, C plan. This is merely a means of regulating income and getting a good grasp of how much you need to save – and how much you can afford to spend. Each month, you can be in one of the following financial positions;
- Easily afford to pay rent and bills with extra money for expenditure and savings.
- Be able to pay rent and bills but with little to no money remaining after necessities are covered. May need to tap into savings.
- Struggling to pay rent and bills – barely enough to survive on.
Obviously, the goal is to never reach C. Evaluating which letter you are on each month helps you plan for the future. If you are regularly on B, you might need to disperse savings more equally between months or rethink your budget so you find ways to spend less money. If you hit C then you’ll need to consider how and when you are going to be able to raise your monthly income as quickly as possible, and whether you are able to cut back on certain lifestyle costs or even take on a second job.
Aside from budgeting, Chris Lott offers a tip on how to survive on a commission-based sales salary. He explains that, “having your self-esteem intact is mandatory. To stay in a commissioned environment day after day, month after month, year after year takes a kind of faith in yourself. You really need to believe in not only your abilities but that successes will come. You need to know that the efforts invested will eventually come to fruition.”
Sandra Garth, Business Owner
Sandra Garth owns an online business specialized in providing tableware and decorations for parties. Though she has a good grasp of the minimum profit the website will make each month, she keeps detailed records on the times of year that weekly or monthly profits rise above average. Her business does especially well during holidays like Halloween, Easter and Christmas – so she budgets accordingly.
“If the income pattern differs dramatically one month, and our profit does not meet expectations, then we analyze why our sales might have fallen from this time last year. Looking at these patterns help us evaluate whether we are effectively capitalizing on seasonal trends and whether our range of products are continuing to effectively meet demand,” Garth explains.
Paul Drayson, Musician
“For a performer whose workdiffers month to month, the priority for me lies in landing gigs and immediately receiving non-refundable deposits. That might mean spending some money on promotion and agents, the cost of which needs to be factored into your budgeting,” Paul Drayson, a musician, explains. You should always have gigs booked a minimum of three weeks in advance. Something unexpected and impromptu might get scheduled short-notice – but see that as a pleasant surprise. Never bank on it.”
You never know when a show might get cancelled, so Drayson suggests basing your budgeting on deposits only. Ideally, you should get to a stage where you could live off your deposits alone – the second part of the payment will go towards your savings. It’s not easy, and requires a lot of discipline, but it will put you in a great and comfortable position.
Becoming an effective budgeter of an irregular income, to the point where you can put aside some cash each month and never have to stress, is no easy task. But with a little time and practise you’ll see that detailed bankroll management is well worth the effort.