Spending more than what you have in hand is a common problem for many. It is best to keep a track of your spending habit and never exceed total expenses more than your income.
It is easy to plan your finances when you are sure about your monthly income and expenses. You can easily demarcate the budget and figure out the amount to be spent, and also the savings out of your total income. However, if your income is not fixed then it becomes a little difficult to manage expenditures and savings in advance. Salaried people are at an advantage in this scenario and can plan their future finances. On the other hand, self-employed and freelance professionals have an irregular income situation, so they find it a bit difficult to manage the finance.
However, using some simple yet smart methods can still let you manage your erratic income like a regular income.
Let’s check out five ways to manage your finances when your income is not fixed.
Track spending regularly
Spending more than what you have in hand is a common problem for many. It is best to keep a track of your spending habit and never exceed total expenses more than your income. You can use various mobile applications to track this and figure out well in advance to ascertain your gross expenses.
You should note down your last 12-month expenses and average it out to ascertain the expected monthly expenditure need. This would help in planning your future spending better and arrange the finances well in advance.
Maintain adequate cash reserve
You must maintain adequate liquidity reserve to meet all your expenses based on your past spending habit. In the absence of adequate liquidity, you may get yourself in debt trap.
If there is a time lag of around 15-30 days in receiving the income, then you can use multiple credit cards with different billing dates to bridge the income delay. Using credit cards can help you to get liquidity when you know your income is expected to get credited within a specific period.
Cash reserve should be kept separate from your contingency fund. The purpose of cash reserve should be to meet your regular expenses when your income is not regular. You should maintain the contingency fund separate from the cash reserve. Contingency fund should be sufficient to handle your financial obligations if your income is delayed beyond regular trend.
Hold all income in a bank account
You should keep all your money in a bank account. It will ensure that you do not spend money recklessly and will also help you in tracking any kind of withdrawals. You can mentally set a threshold limit to figure out when you may run out of money if the bank balance drops below your set limit.
Save first, spend later
The thumb rule to avoid a liquidity crunch is to save first and spend later. Many people have the habit to spend money before they get the income in hand by using the debt instruments such as credit card. It may lead to serious financial repercussions and could lead to a debt repayment crisis. If you practice the habit of saving the money first, using it to invest for your financial goal and then to spend money from the remaining funds in hand, it helps you to build adequate reserves for the long term.
Emergencies like health issues or physical disabilities come unannounced, and cannot be avoided. However, such risks can be mitigated by getting an appropriate insurance product as an erratic income may lower your potential to handle such situations. Life insurance can provide financial support to one’s family in case of his death. Similarly, medical insurance would ensure a quality treatment during health emergencies. You should opt for a cashless health policy to avoid immediate fund arrangement in case of a health emergency.
You should practice strict financial discipline to manage your finance in a better way if your income is erratic. Avoid unnecessary loans, do not spend on high value items without planning and stick to your financial objectives. Keep your personal expenses separate from the business expenses as it would help you to manage the finance easily. Planning is important for every person and it is even more important for a person whose income is erratic. So, plan well, stay financially disciplined and enjoy a normal life despite having an erratic income.(The writer is CEO of BankBazaar.com)