Budgeting With an Irregular Income
Using a budget is an essential skill in managing personal finances. If you are a business owner, farmer, rancher, earn based on sales commissions or are seasonally employed, you may not have consistent income from month to month. When your income is irregular, it may be difficult develop a budget that can be used to plan your spending for the month. Knowing how to begin developing your budget with the varying monthly income can be overwhelming.
To calculate your income when it is irregular, you need to first determine the amount that would be an average monthly paycheck. Your budgeting strategy would then be to save income from the months when you earn more than the average so you have funds to draw from for the months when income is below average.
Calculating Average Monthly Income
Following is an example to illustrate the calculation. Gather paystubs and/or review deposit statements from the past 12 months. If you are just getting started in your job and are unsure of the year’s earnings, review documentation from as many months as you can, 3-month or more. Calculate the total earns for the number of months you have income. The example shows 6 months of income totals $28,250, with monthly income ranging from $3500 to $6000. Then, divide the total income by number of months. For the example, $28,250 is divided by 6 to determine the average monthly income is $4500.
The column labeled “difference” shows the difference in average income and budgeted income. A key financial habit for consumers with irregular income is the save the difference so those funds can be used in the month when actual income is less than budgeted income. The example shows month 3 and 6 have an actual income less than budgeted. The needed funds to balance the budget each month would come from savings.
Managing Monthly Expenses
Now that you know what your steady paycheck will be, you can calculate your expenses and analyze the monthly balance. See Developing a Spending Plan/Budget. Each month you should review your income and expenses. You many need to make adjustments if your income either becomes less than you have planned or increases. Once you know which months your income will be lower, you can better plan by adjusting your expenses and spending habits. Examples in ways to adjust expenses are to reduce grocery expenses, drive less to reduce gas, reduce extras such as movies and going out to eat and cutting out non-necessities.
Whether your income is regular or irregular, budgeting will guide you in making decisions and having control over your finances. Work with your budget regularly to develop a plan that works for you.
Source: Lorna Saboe-Wounded Head, South Dakota State University, iGrow