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Irregular Income? Here’s How To Budget

1 write down your goalsWhat is a budget? And why does one need it?

Budgeting is a conscious effort to allocate a given income to various expenditures over a particular period of time.

Budgeting has two main purposes.

First is to determine where the money is being spent. And secondly, what money is saved after spending.

Making a budget may seem to be very cumbersome the first few times.

With effort and time one can become a pro in budgeting. The benefits of having a budget are so numerous that it may make you think why you never attempted it before.

Below are enumerated the benefits of making a budget.

  1. Helps in reaching a financial goal faster.

A budget provides a clear understanding of the person’s finances and lists all debits across the various credits. Just like a road map helps reach correctly without driving here and there, a budget helps the person making it to reach his money goals faster without many deviations.

  1. Helps in prioritizing needs.

A budget can help stop unnecessary expenses that are made impulsively to address  pressing need to acquire a priority item. A fiver here and a ten bucks saved their adds up to a big sum to buy that one thing you never had enough money for.

  1. Helps in building savings:

A budget can help save money that can slip by as sundry expenses. Money saved in banks and locked in investments has potential for making more money in the form of interest and equities. In this way a budget can make your money work for you.

  1. Helps in planning a healthy retirement:

When a person starts budgeting early in life, it can help in planning rich retirement life because all the savings have decades of times to compound interests and make them comfortably high.

  1. Ensures good sleep and peace of mind:

With a budget, there is no doubt whether he is cash strapped or he is cash surplus. All his commitments are well timed and planned, therefore he is assured of what the future holds for him.

  1. Helps in planning for a contingency fund:

1 business woman holding mobile phoneThe world we live in very unpredictable. There can be an emergency in any form. To say that you are not prepared for any is like living in utopia. Therefore, budgeting helps to stash away a little every week or every month to an emergency saving fund.

This money will be useful when there is a personal emergency or a financial one. And you will thank yourself for having saved every penny for the rainy day!

Having enumerated the benefits, it must be clear why making a budget is important. The fact that you derive regular pay check every week or every month, depending on your period of remuneration and budget it will keep you in control of your finances.

But what happens if you do not have a regular income? How do you budget then?

First on, what is irregular income?

An irregular income is when the remuneration does not follow a set period of time. Examples of people who derive irregular income may be one of these, if he

  • Does not hold permanent job/who does not work for fixed number of hours.
  • The person is self employed running his business at a small scale
  • A contract worker
  • A Consultant hired for a specific job
  • A commissioned worker drawing commission on sales.
  • A person belonging to an industry where a major part of his income is supplemented by tips and service rewards.

What are the difficulties of budgeting on irregular income?

1 loans and mortgages

  1. Confusing:

A person who draws irregular income may gawk at the idea of drawing a budget. The fact that he does not have a set amount coming in every week or every month can be daunting. There is no predictability on his income and therefore he may not be able to draw a budget at all.

True, but the fundamental of budgeting is to remove the ambiguity and get q clear picture of his finances. So this is no excuse at all to avoid budgeting.

  1. Hard work and no fun:

Reading complicated reports on earning, spending and then saving and trying to determine strategies to determine increased cash inflow and decreased outflow can be hard work and absolutely no fun at all.

Given! But it is absolutely essential to budget in order to climb up in life. Hard work early in life will ensure you can have fun later.

  1. Complicated and time consuming:

Yes and no, budgeting may be time consuming but there is no hard and fast rule that it has to be complicated. There is no need to be overwhelmed by complex strategies and geeky advices given by the finance gurus. All one needs to budget is to know basic mathematical operations like addition and subtraction.

A budget in its simplest form is the complete income against the cumulative sum of the person’s entire expenditure. If the cumulative sum arrives at zero, then the person has utilized all his money. If there is any amount however small left in after all expenditures are met, that amounts to his savings. If there is any negative sum remaining that means the person has overspent his income.

  1. Depressing:

Budgeting on irregular income can throw up unpleasant surprises. There may be weeks when the bottom-line is zero and yet sometimes there may be leaner weeks or months when the person may struggle to even pay for his essential services. The fact that he knows that he is cash strapped can be depressing.

If the person knows that he is cash strapped, what is he doing to come around it?  With prior knowledge that he may end up not having enough for his basic expenditure can help him plan more work in his free time or run errands for people or using his time constructively working on gigs to supplement his income. Knowledge from budgeting can empower him to take control of his life or face the tune.

Now that the importance of budgeting is clear even for a person who derives an irregular income, let us see how to go about it.

  • Step 1: make a list of all your expenditures,
  • Step 2 : calculate the income that you derive,
  • Step 3 : stash away the extra for the rainy day.

Step 1:

Budgeting on fixed income always starts with noting down the entire income first and then reducing the expenditures. But in the case of irregular income we start by doing the reverse. The total expenditure has to be calculated and then income has to be allotted to each and every expenditure. Learn more with: [PDF]Managing your money – MoneySmart

The chart shows a total break up of expenditure.

blue colour indicates essentials 50% of the income

red indicates priorities 30%of the income

green indicates the lifestyle expenses 20% of incomes

EXPENDITURE 50:30:20 RULE

1 expenditure 50-30-20 rule

Figure 1 types of expenditure

The 50:30:20 rule – if the income of the person is irregular, then the expenditure has to be predictable. The person will have to divide his expenditure into three categories. They are

  • Essentials
  • Priorities
  • miscellaneous

What is an essential expenditure?:

An essential expenditure constitutes every expenditure that has to be compulsorily paid. These are the services without which the person may not be able to live

  1. groceries
  2. housing (rent, paying back loans)
  3. insurance and taxes
  4. mortgage
  5. electricity bills
  6. phone, mobile and internet bill
  7. medical and pharmacy bills
  8. health insurance premium
  9. transportation and conveyance

What is priority expenditure?

Priorities are things that the person will need in order to maintain his work and life balance. He needs them to enjoy a decent standard of living and to be associated in the society that he belongs to. For example, good clothes, foot wear, a nice car, etc.

What is a miscellaneous expense?

Miscellaneous expenses can be also called as life style expense or the fun expense. These are the expenses that the person needs to have a good time in his life. These expenses are secondary to none.

Everybody yearns to have some good time for self and family after hard day’s work. Examples are dining at restaurants and bar, coffee on the move, watching movies at the screens and binge shopping once in a while at malls.

Once the skeletal expenses are noted down, the person may move over to step 2

Step 2: calculating the target income

Once step one deduces an answer as to the total expense that a person expects in his week or month, step 2 involves adding tax the amount to correctly derive at the income that a person has to generate in order to maintain a decent lifestyle.

There is a probability that the irregular income is exhausted by the time he is in step 2. Some amount still left?

Welcome to step 3: setting up saving accounts

1 couple sitting on a couchWhy should he save?

The prudent answer is that if there is any emergency personal or financial, the savings that he will maintain and manage will be worth in god till he overcomes his personal tragedy or loss of livelihood.

Why set up separate bank accounts?

A separate bank savings account helps maintain funds in different categories and helps especially to avoid overlapping of expenses. For example, “Saving for a new car account”. In this, the person needs to stash away a sum every budgeting period and not use this except for the determined reason.

The types of accounts that he can set up are

  1. daily usage account:

the daily inflow and outflow of cash has to be maintained from this account.

  1. Personal account:

This is an account for any money that is left for lifestyle account.

  1. Saving for emergencies:

This account is mainly for saving for unforeseen or unfortunate emergencies.

  1. Priority savings:

This saving is for mortgage repayment, loan servicing, etc

What is micro saving?

Micro saving is a system where people from the lower income strata are allowed to save money at banks without having to maintain a minimum balance.

The reason for starting this system is to encourage saving habit in the people who need it most. The saving amount could be very little and that should not deter them from saving it anyways.

The people who draw irregular income mostly belong to this category and having this benefit can help them have a financial goal to reach.

 

What is a financial goal?

A financial goal is a target that revolves around finance. Setting a financial goal is extremely important in every one’s life. It helps accelerates growth due to the fact that the person does his economic activity with his goal in focus.

The goal is divided into three based on the time it takes to reach it

  • Short term goal requires a time frame of 0-3 months. Eg. To buy a good pair of shoes
  • Medium term requires a time frame of 3 months up to a year. Example, getting a promotion.
  • Long term goal takes anywhere from one year to few years. Example to own a house.

Why do we need to set up financial goals?

It is important to set them because they are a smart choice. There remains no confusion in the path to achieve something and there is always something to strive for.

What is the Dave Ramsey form for irregular income?

Dave Ramsey is a personal financial expert who helps people budget with their incomes. He recommends for people with irregular incomes what he calls the “zero based budgeting”.

LIST OF INCOME

First is to make a list f every income that is generated. If he is married, then the combined income of the spouses.

Second, make a comprehensive list of the expenditures down to the last dollar. Deliberate on every little spending.

Thirdly, Subtract the expenditure from incomes to derive at ZERO.

Fourthly, track all the expenses carefully. Use pen and paper, a mobile app or his laptop. However, make sure that the tracking is done till the last dollar is exhausted,

He believes that every dollar that a person earns has a mission and therefore tracking the income and expenditure can only help him meet them.

Finally

People with irregular income and those who start to make budgets find themselves more in control of their money. It may take some time for him to like. In course of time he will definitely see the benefit of knowing where every penny of his hard earned money is going.

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