Whether you are self-employed, a freelancer or a casual employee with a fluctuating hours, keeping a budget is one of the best ways to keep track of whether you will be able to meet your financial commitments.
The more accurate your budget is, the better chance you will have at keeping yourself out of financial strife. Listed below are just a few ways you can budget on an irregular income.
Set up an emergency fund
An emergency fund should be something everyone sets up, no matter what type of income they have. An emergency fund acts as a safety net if you were to come into unexpected financial strife. For example, you may fall ill and be unable to work for a couple of weeks. Being self-employed or casual you don’t have sick leave to fall back on. Your car could break down or your fridge or washing machine could stop working. All of these problems can be costly and an emergency fund can help tie you over until your next paycheck.
Pay necessary bills first
It may feel like you are drowning in debt and feel like you are getting nowhere with repayments. This may be the time to start prioritising. Write down all of your financial commitments (such as credit cards or personal loans) and note the amount owing as well as the interest rate. It is a good idea to prioritise your repayments based on the interest rate. The debt with the highest interest rate is costing you the most and should be your highest priority to pay off quickly. Although you will need to maintain the minimum repayments on all of your debts, make an effort to put any extra cash towards your first priority. This way you will have a plan and start to feel like you are getting ahead, one commitment at a time.
Avoid using credit
Relying on credit to pay your expenses is a dangerous and expensive option. Putting all your expenses on credit and paying in full at the end of the month is a good option for people with a regular reliable income. If you do not have a regular income and start to use your credit card often, you run the risk of not having the cash available when it is due and start incurring interest at credit card interest rates which tend to be very high. A debit card could help limit your expenditure to what you have so that big credit card bills don’t sneak up on you.
Update your budget regularly
This is especially important for those on a fluctuating income. Keep a track of your actual expenditure as you go and regularly sanity check the budget you have allowed in coming months. By regularly updating your budget, you will have a clearer idea about whether you will be able to meet repayments down the track. It will give you the chance to cut back on expenses if you need to or create a plan to earn a higher income.
Rethink your home loan
Your mortgage is probably one of your biggest financial commitments and if you are not on a regular income, it may be difficult to meet repayments every month.
Whether you already have a home loan or are looking to get one, there are flexible options available to suit those with irregular income. For example, the State Custodians Line of Credit Home Loan gives you flexibility around repayments. It doesn’t require a minimum monthly repayment as long as interest can be added to the loan without taking it over the limit. This means that when you receive a good amount of income you can pay your home loan well below the limit, thus building up a buffer for months when your income is less. It acts like an interest only loan so requires discipline to ensure that you are actually paying of your home loan as you can redraw back up to the limit at any time.
State Custodian loans also allow you the flexibility to access equity in your home to use for business, investment and personal purposes. The loan can be split into sub accounts so that funds used for each different purpose can be tracked separately. This is particularly useful for tax purposes when you are claiming a tax deduction on the interest.
If you are looking at getting a home loan, look around at lenders who have a range of loans for self-employed borrowers and have the expertise to find solutions. You can chat to them about your business income and what income evidence you are going to be able to provide. They can advise you on your options.