Suggestions about how to budget when your income is unpredictable?

[Kazak]

My wife is going into business as a freelance editor so that she can spend time with our 2-year-old daughter.

Her monthly expenses for this coming school year will be as follows:

$100 for part-time daycare
$250 for health insurance
everything else towards extra payments on our car, hopefully at least $100 per month

The problem is, her paychecks come in fits and starts--she might make $300 in one week and nothing for the rest of the month. She doesn't have a feel yet for how much money she is going to average per month. I think it would make sense for her to put some of her money in savings to start with, but how much? Is anyone here on a binge-and-starve type of income to be able to give her some advice on how to make a budget, especially for the first few months while she is starting out?

[laylah]

1. My only suggestion

would be to budget targeting your income only. I know! Not a comfortable feeling but that way, she can pay bills as her freelance work expands. Just a thought.

And GOOD LUCK! :hug:

[Gormy Cuss]

2. Two things.

From your posting it looks like the break-even point will be somewhere between $550 and $800 gross receipts per month to meet those expenses depending on your tax bracket and the amount of eligible deductions. She should expect the first 90-180 days to be at a loss unless she has a backlog of work already. Once the money begins to flow, the simple budget is that her cumulative costs against cumulative earnings should be used to track expenses and a reserve of one to three month's cash should be a goal. In other words, until she has a sense of how the money will flow it's best to consider money spent unless she has more than 3 x $450 net in her business account. After a while she'll be able to adjust it to reflect her actual cash flow and either keep more or less in reserve.

She should keep a good account of when work is billed and when payment is made by client name. Some clients will consistently pay faster or more consistently than others. Some may cut freelancer checks only once a month. Some will delay payment as long as possible but are good steady clients so worth the effort. Knowing the expected lag time helps to budget.

Second, she needs to think about estimated taxes before the end of the first quarter of freelancing because depending on the amount she earns she may need to start paying taxes this year rather than wait until she files for 2007. There are forms, worksheets, and instructions available at www.irs.gov and the the key ones are Estimated Tax form (1040-ES)and Schedule C.

[Kazak]

3. Thanks!

That is good advice, thank you.