Budgeting can be tricky even on a fixed monthly salary, so adding the ‘irregular income’ wild card can really shake things up. The fact of the matter is though, for many people this is a reality. Freelance writers and web designers, contractors, consultants and basically anyone that works on a fluctuating schedule have to manage their personal finances on an income that can be up one month and down the next. So what’s the best way to handle this difficult situation?
If you need to smooth out an irregular income and craft a budget that caters for peaks and valleys in your earnings, take a look at the following steps.
Calculate Your Average Monthly Income
The trick to budgeting on a fluctuating income is to find your bottom line or your base income. You should be able to look back over time and find an average of how much you can reasonably expect to make. A simple way of doing this is to find the average of your income over a six or twelve month period and use that as your base income. The average figure will take into consideration your lowest and your highest months and come up with a figure that is somewhere in the middle. This can be used as your guide to predicting future income.
Draft a Budget for the Necessities
The next step is to draft a budget for those things that definitely must be paid and attended to. For instance, all your fixed expenses, such as mortgage payments and other loans, along with an estimate for basic necessities such as food and gas should also be included.
Pay Yourself a Salary to Match
To budget on a fluctuating income it is best to pay yourself a steady income regardless of how much you make for the month. Your ‘salary’ should match the amount you need to cover your basic budget. This approach means that there will be some months that you will put a large amount into savings and other months where you may need to drawdown on savings to meet your monthly allowance. To make this really effective it is best to have two separate bank accounts. One will be used to deposit your monthly allowance or ‘salary’ and the other to hold your surplus income or savings.
Save the Difference
It is important to have the discipline to continue to save the excess in times of plenty, because it is this restraint that will provide for your living expenses in leaner times. The savings account will eventually have sufficient money so you can transfer some to a higher interest instrument or consider increasing your monthly allowance to give yourself a bit moreroom to spend.
Find an Additional Income Stream
An irregular income suggests that you have surplus time during some months of the year. If this is the case, you can consider starting a part time business to bring in some extra money in your slow periods. Any income from extra work should also be put into savings to build up your emergency fund or save towards other goals.
Budgeting on an irregular income is not as difficult as it would first appear, but it does require a lot of planning and a large dose of discipline. If you can follow the steps outlined above you can soon break out of the cycle of feast and famine that plague so many who live on a fluctuating income.