Sunday, October 25, 2015

14 Budgeting Tips for Irregular Incomes


Due to economic changes such as the 2008 recession, government shutdown, natural disasters and other events many who are unemployed have become entrepreneurs. Unfortunately the disadvantage is not knowing how much you will earn until you earn it or receive it in your bank account.

Irregular income is defined as income you receive as an individual or business that is variable. Some months, your income might be high, some months it may be consistent and some months it may be low.

Your paycheck doesn’t look like regular employee paychecks that are received bi-weekly or monthly. In addition, you have to pay your own FICA for taxes, social security and Medicare. You can may receive a partial or full commission, bonuses or receive child support or alimony. You may work as a consultant, temp, on-call worker, day laborer, artist, musician, seasonal income worker, perform odd jobs, earn income on tips, or work as a freelancer.

If you receive irregular income, budgeting is critical to your financial success. However, it can be difficult to track if you have multiple jobs that provide irregular income.

For the current month, spend what you earned the previous month. Save enough money to live on for the entire month without using your current irregular income. This way you will always be ahead and spend this month what you earned the previous month.

Ensure you allocate all money towards a category – bills, spending, savings and investment, etc. If you have any money left over that is not accounted for it will be tempting to spend it. Budgeting involves organizing your finances, and this can be challenging when your income fluctuates. No matter how much you earn you must use a budget. Here are 15 tips to help you manage your irregular income.

  1. Know your cash flow. Create a monthly and an annual budget. Know how much you earn and spend per month and per year. Identify the lowest amount of money you earn over 12 months (lean income) and identify the highest amount of money (surplus income) you earn. Divide your previous year’s income by 12 to determine your estimated or average monthly income for the current year.
  2. Create a budget. Create a traditional budget that also identifies the priority of when bills need to be paid and bills that must be paid each month such as mortgage or rent, car payment and insurance, other insurance, utilities, cell phone, prescriptions, personal care, etc. Try to schedule your payments based on when you receive your income.
  3. Prioritize. Prioritize your budget from 1 to 50 with 1 being the bill that has the highest priority for being paid each month. Include monthly fixed expenses in your list of priorities. Based on your leanest income during a 12-month period highlight each item in red that until it totals your leanest income for one month. These are the only items you can pay when you receive your lowest income for any month. Subtract your average monthly income minus leanest monthly income. If there are any highligted red items that haven’t been paid pay those first. Highlight all the items that can be paid with the additional money in green. If there are any high priority items that were not paid you need to make some adjustments to reduce spending or increase your monthly income.
  4. Set up a flexible savings account. Create a flexible or variable savings account. Put money into this account to pay for the green highlighted items such as hair salon, clothing, etc.
  5. Always be ahead. Try to budget at least 1 - 3 months ahead. This can be achieved by saving a portion of your income during high earning (surplus) months.
  6. Sales cycle. Know your lean months and plan accordingly to ensure you have enough funds to cover expenses during those months.
  7. Track spending. Use a smartphone app on online tool to track spending such as, Expensify or your bank mobile app. Include business expenses and miscellaneous expenses in your budget. Set daily or weekly spending limits. Setup alerts or reminders when bills are due or when account balances get low. Review your budget monthly and make any necessary adjustments.
  8. Accounts. Create separate business and personal checking accounts. Deposit all your irregular income in your business account. Pay yourself an income from your business account that will be transferred to your personal account and used to pay for all personal monthly bills and expenses.
  9. Create an emergency fund. Create an emergency savings fund to cover monthly bills and expenses for 12 – 15 months. Start small by saving enough money to cover bills for one month and continue until you have reached your goal. Save on a regular basis either every week or every 2 weeks.
  10. Automate. Automate your finances by paying bills online to contribute to your savings account.
  11. Variable expenses. Include variable expenses in your budget like car or life insurance, security monitoring, lawn care or pest control. Identify them as variable expenses and when they are due - quarterly, bi-yearly or yearly.
  12. Income sources. Identify all sources of income and the total earned from each monthly. Identify if they are variable or fixed income sources. Include fixed income sources in your budget. If you know when you will receive the variable income, use it to pay variable expenses.
  13. Surplus. If you make more than you estimated, you can take a portion of the earnings and roll it over to the next year to buffer any future deficits. This prevents overspending and impulse shopping.
  14. Taxes. Ensure you set aside money to pay for taxes yearly on April 15th. If you are in the 20% income bracket set aside 20% of your income for taxes.

1 comment:

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