Planning your monthly budget can be a challenge when you aren’t paid on a regular schedule, but with the right strategies you can keep on track.
In the entertainment industry the traditional 9-to-5 job has rarely been the norm, with most creatives experiencing a dynamic income stream. Whether you’re just getting started as a creative professional or you’re a veteran of the industry, income smoothing (see below), proper budgeting and planning can help you refocus your financial picture.
What is Income Smoothing?
The process of income smoothing involves moving revenues and expenses from one accounting period to another. At the heart of this strategy is a robust emergency fund. This separate savings account is a financial buffer you can draw from when your income dips below your cost of living expenses. Ideally, your emergency fund should cover at least three to six months’ worth of living expenses—but even a relatively small fund (think: a few hundred dollars) can provide a crucial safety net, helping you avoid unplanned credit card debt or other high-interest borrowing.
Building an emergency fund can seem daunting, especially when your income is unpredictable or you’re managing debt. Aim to save a portion of every paycheck, and when you have periods of higher income, split the funds between debt paydown and building up your emergency fund. Automating your savings through direct deposit or scheduled transfers can make saving a consistent habit.
In addition to your emergency fund, consider setting up separate savings accounts for specific purposes, like a vacation, future car repairs or tax savings. By compartmentalizing your savings, you can ensure that you’re prepared for unexpected and planned expenses, making it easier to manage your variable income.
Budgeting for Variable Income
Effective budgeting is another crucial aspect of managing variable income, especially when you embrace non-traditional budgeting methods.
The Zero-Based Budget: With this method, you assign every dollar of your income to a specific expense or savings category at the beginning of each month. When your income is higher, you allocate more money to savings, debt payoff, and discretionary categories. When your income is lower, you focus on covering essential expenses and drawing from your emergency fund if needed.
The Lowest Monthly Income Budget: This conservative approach ensures that you can always cover your basic expenses. List your essential expenses–such as housing, utilities, food, and transportation–and make sure that your lowest monthly income can cover these costs. Any extra income can then be treated as a bonus and allocated to savings or even discretionary spending.
It’s also important to regularly review and adjust your budget as your income and expenses change over time. Set aside time each month to review your spending, assess your progress toward your financial goals and make any necessary adjustments to your budget.
Planning for the Future
While income smoothing strategies can help you manage short-term income fluctuations, planning for your long-term financial future is also essential. This steps also includes saving for retirement, even if you don’t have access to a traditional employer-sponsored plan.
Self-employed individuals and freelancers can save for retirement using Individual Retirement Accounts (IRAs). Like traditional 401(k)s, these accounts offer tax advantages and allow you to manage how you invest your savings. The key is to contribute consistently, even if the amounts vary based on your income.
It’s also crucial to have a plan for managing your taxes. When you’re self-employed or have multiple income sources, you’re responsible for calculating and paying your own taxes, including estimated quarterly tax payments.
By combining the methods above, you can create a stable financial foundation by establishing a substantial emergency fund, adopting flexible budgeting practices, diversifying income sources and planning for taxes.
