Yes, you’ll avoid late fees and dings to your credit, but as anyone who’s failed to plan will agree, few things feel worse than not knowing how you’re going to pay for something you need.
Who needs that?
If you have a variable income you’re probably thinking, yeah, that works great when you know what’s coming in the door each month, but what about me? How do I budget when my income changes month to month?
Law of averages
The overarching concept of managing a budget when your income is variable is to use “averages” rather than set amounts when calculating money coming in.
When you know the top and bottom amounts of money coming into your household each week, month, etc. you can create a plan that will take advantage of the ‘good’ months in order to cover any shortfalls in the ‘bad’ months.
Monthly and yearly averages
If your irregular income includes both an hourly rate and tips, try to use the base pay – if possible – as a baseline.
Review your bank statements for the prior year and figure out how much you made in both tips and your hourly pay.
If you haven’t been in the same position for at least a year run the numbers that you do have and ask your co-workers about when and how their income changes.
In short, you want to have an idea of the ‘slow’ and ‘peak’ times you’ll experience.
Use what you discover to figure out the minimum you can expect to take home each month.
Create a ‘sinking fund’ for your income
A sinking fund consists of monies that you set aside to cover shortfalls. This fund can either be held in a separate account or as cash on hand to prevent accidentally spending it.
Since your expenses won’t change a great deal from month to month you’ll have extra cash during high earning months to deposit into your sinking fund.
Determine your net loss/gain
After figuring out your monthly and yearly numbers, divide your annual income by 12 to get an average monthly income.
Then, subtract your bills from your average monthly income.
The number will be either positive or negative. The positive number reflects a MINIMUM you should save; a negative reflects the MAXIMUM you can pull out of your sinking fund.
What are your monthly expenses?
Using your last 3 month’s bank statements, make a list of every expense…no matter the amount. Add bi-annual and annual expenses like insurance, property taxes, etc. to this figure until you have a grand total.
This includes your monthly bills as well, which you can total for the year, then divide by 12 to reach an average monthly amount.
- ⬥ Your “income sinking fund”
- ⬥ Emergency fund (minimum of $1,000)
- ⬥ Christmas gift fund
- ⬥ Medical fund (for co-pays, deductibles, etc.)
- ⬥ Car fund (for replacement, repairs, maintenance, etc.)
- ⬥ Tolls
- ⬥ Personal care (e.g. haircuts)
- ⬥ Membership fees
- ⬥ Tuition costs
Note: In some cases (e.g. electric) companies will send you a set monthly bill that is an average of your usage.
Looking at your obligations and organize them in terms of discretionary and necessary spending.
Prioritize your bills according to those things that are important to your survival.
- ⬥ Food
- ⬥ Water
- ⬥ Utilities
- ⬥ Shelter
- ⬥ Transportation
Next, figure out how much you can put into savings. Experts recommend a minimum of $1,000 for an emergency fund. (hint: you’ve already included your income sinking fund as a ‘bill’ so you should have what you need to cover any shortfall each month)
Categorize your savings according to importance. This will vary depending on your particular situation.
For example, your savings priorities might look like:
- ⬥ Emergency fund
- ⬥ Debt payments
- ⬥ Sinking funds (above what you’re already contributing)
- ⬥ Retirement savings
An optimal scenario would be the ability to fund your savings even during the months you bring in the least amount of income.
Calculate discretionary spending
After you’ve calculated your necessary spending, determine levels for discretionary spending.
Using a zero-based budgeting principle – which means every dollar you have is assigned to a spending or saving category – set an amount for your discretionary spending items.
Here’s an example:
- ⬥ Gym membership – $35
- ⬥ Coffee – $25
- ⬥ Entertainment (movies, dinner, etc.) $100
Let’s say you’ve got $100 left after paying bills that can be used for discretionary spending. This means that after the gym membership and coffee fix you’ve got $40 to spend towards entertainment.
The remaining $60 shortage (from your ‘entertainment’ category) can be funded either next month or with your next check.
As you see, you can organize your discretionary spending according to what’s important to you so that you always have money on hand for the ‘little luxuries’ in life.
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