The biggest confusion seems to be around what to do if you don’t have the same amount coming in month after month or week after week. I’ve talked about this before, but let’s give it another go:

In order for a budget to work, you need to follow some basic rules. Here are The Gail Rules:

1. The budget must balance. Since you can’t spend more money than you make without creating huge problems for yourself, this first rule is the foundation of money management.
2. You must save something. Saving isn’t a nice-to-do that you accomplishing with what’s left over every month. Saving is a Must Do, which is why you must allocate some money to savings each month. Make the savings automatic by setting up a monthly transfer to a high interest savings account and you’re locked and loaded.
3. You must pay off your debt. All that money you spent that you haven’t yet earned has now come Due & Payable. Yup, your shopping has come home to roost. Each dollar that you spend in interest is money down the drain. And each month that you make only your minimum payment takes you a step closer to Debt Hell.
4. You must make provision for the “risk” in your life. Emergency funds and insurance are the tools that you use to reduce your exposure to risk and financial ruin.

Time to make your budget. Your budget is broken down into two parts: Fixed expenses and Variable expenses.

Fixed expenses are the things you pay regularly for which you must cough up a specific amount of money. For example, rent is a fixed expense. So is your car payment.

Variable expenses are the things that change somewhat each month. For example, while you may budget $600 a month for food for your family, that amount isn’t fixed since it may fluctuate depending, for example, on the season or what you must buy this month. (Gee, why does all the laundry stuff run out at the same time?)

But budgets can also be broken down along the lines of Needs and Wants or Must-Haves and Nice-to-Haves. Within your Fixed expenses, for example, you may be living in a place that costs you a bundle every month. That’s not a need. You need to keep a roof over your head, but you don’t need to live in a McMansion. If you can’t afford it – if your cost of accommodation is pushing your budget out of whack and there’s no where else to cut back – it may be time to call the movers!

Take these steps to make a budget

1. Take your budget worksheet and enter in your net income… all of it.

2. Now enter in your Fixed expenses, starting with the Must Haves: (Use black ink to enter these numbers so they are easily identifiable as Fixed Must Haves.)

• Rent or mortgage payment/property taxes
• Car payment
• Insurance
• Saving
• Debt repayment
• Emergency saving

Saving, debt repayment and emergency savings are MUST HAVES. Remember Rules #2, 3, and 4! The must-haves are the things that won’t go away, so you must plan to have them covered every month. While you may be tempted to ignore savings if your budget is tight, don’t. Even a small amount like $25 a month gets you on the right path. Totally ignoring savings until “things get better” means you’re stuck in Not Saving Land. Just a little is all it takes to cross the border.

3.   Now enter in your Variable expenses, starting with the Must Haves: (Again, use black ink to enter these numbers so they are easily identifiable as Variable Must Haves.)

• Groceries
• Transportation
• Medical

4.   Go back to your Fixed expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Fixed Nice-to-Haves.)

• Telephone
• Cable

The nice-to-haves are the expenses that you can make go away, although variable nice-to-haves are easier to cut back on in the low-income months. But even fixed nice-to-haves can be moderated (use your cell phone less, cut down on your cable package for a couple of months) if need be.

5.   Go back to your Variable expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Variable Nice-to-Haves.)

• Clothes
• Gym membership
• Travel

Sometimes there’s a cross-over between must-haves and nice-to-haves, like when your only pair of winter boots are no longer servicable: then that “clothing” item becomes a must have. This is particularly true if you have kids who will insist on growing. In this case, you put in a must-have number to cover the basic needs, and then upgrade it to a nice-to-have number for all the extra things you will want. If you have to cut back later on, the nice-to-have have got-to-go!

6.   Add up all your expenses.

7.   Subtract your total expenses from your total income.

8.   Do you balance? If you’re over, you’re going to have to either cut back on your expenses or find a way to make more money.

When you’re working with a variable income, it is at this point that you need to make some big decisions. In your dry months – lowest income months – you may only be able to afford the basics. In your flush months – highest income months – you need to:

• catch up in some categories of your budget you may have been squeezing, like home maintenance, vacation, clothes, gifts, etc.,
• set aside some money to make sure you have an extra pool of cash available for the dry months so you can meet your most basic needs.

9.   To cut back on expenses, start with your Nice-to-Have Variable expenses. Trim back. Then move to your Nice-to-Have Fixed expenses. Are there ways to cut those costs. Next, look at your Must Have Variable expenses: where can you trim there? And finally, are there ways to trim your Must Have Fixed expenses? For example, if your housing costs are high but you really love where you live, could you take in a roomie to help with the costs?

10.   If you can’t make ends meet no matter how far back you cut then you simply do not make enough money. Time to get a second job, a third job or a better job. You have to do WHATEVER IT TAKES. Not making enough and using credit to fill the gap is financial suicide.

The mistake most people make with a variable income make is spending every penny when they have a flush month or three. Having been living on less during dry months, they see the flush months as the opportunity to spend, spend, spend. Big mistake. You must first ensure you have the money to see you through the next dry spell. Then you can go shopping!

I was listening to my make-up artist, Natasha, and DOP, Adam, talking about how to manage their variable incomes. Adam is a freelancer and always has to be sure he’s got a cushion in case the bottom falls out of the camera-guy-world. Tasha is starting her own business – she a terrific clothing designer. They both have to deal with unreliable incomes and all the stress that goes with.

Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast-Today-Fast-Tomorrow Syndrome.  One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the 30th without racking your cards to the max.

Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you NEED and the things you WANT. You have to have a PLAN.

First, you need to set your salary and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time.

Smooth out your cash flow by deciding what your minimum monthly income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, you’ll only transfer this amount into your Household Account for spending. The rest stays in your Biz Account. Then, in a month when you haven’t billed as much as normal, you’ll still have a whack of cash in the Biz Account so you can transfer your Salary to your Household Account.

To figure out your Salary, do up a budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The we-can-live-without-it items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. And don’t forget taxes. Your second-tier budget needs like home maintenance, clothes, entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories get going!

Now you could have a big fat monthly total if you’ve weighed yourself down with big fixed expenses – like that $800 a month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. But I’m going to assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)

Next, you need to build up your just-in-case fund. The standard recommendation for an emergency fund is to have three months’ income or six months’ worth of essential expenses covered. Aside from the typical reasons to tap into your emergency fund — to pay for a car breakdown, unexpected home repairs or a root canal — you also may need to dip into it in when you’ve gone a few months with no work and have run out of money in your Biz Account.

I use the term “run out of money” advisedly. You should never have NO MONEY in your Biz Account, since the business itself has overheads you must cover: telephone costs, car payments, equipment lease costs, and the like. You should always maintain a minimum of six months’ worth of business expenses -– your Business Buffer — in your Biz Account. When you drop to that amount, you stop pulling your Salary so the business can stay afloat. That’s when your personal emergency fund will really pay off.

Remember you also have to save for the future. Since you’re self-employed, if you’re not socking away retirement savings, you’ll have a pittance when the time comes to stop working. Estimate that you’ll need 70-80% of your current income each year in retirement to set your retirement nest-egg goal.

When business isn’t booming, resist the urge to cut back on savings. Cut back on spending, but keep your savings intact since you will need them later. And stash the amount you’ve decided to save in a retirement account monthly using an automatic deduction.

Make sure you also fill the gaps in your safety net. As a self-employed person, you need to have both disability and (if you have dependents) life insurance. Base the amount of insurance you buy on what it’ll take to cover your basic expenses, keeping in mind that some disability policies replace only up to 60% or 70% of your earnings per year.

Use gravy for other goals. Whatever you have in your Biz Account — your Business Buffer and earnings beyond your Salary – should be invested in a high-yield account.  If you’re doing very well financially, you can now decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree.) Build or replenish your emergency fund if you’ve dipped in, and pay down your debt.  But you should also have some fun.

Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years – some lean, some luxurious. And I wouldn’t swap for one minute the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about six months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a LOT of money. And a good thing too. Because when it came time to have my kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?

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