Budgeting for Irregular Income

Budgeting for irregular income can be mastered with careful planning and managing the cash flow. Self-employed people, commission-based salespeople and farmers are a few who have irregular income. The trick is to manage the cash so that the peaks and lows in the income are evened out with a cushioning fund and have an emergency fund for any contingency like unexpected medical bills etc.

Some of the ideas given below will help you to budget irregular income efficiently.

Estimate Cash inflow:

Your income may fluctuate from month to month, but from the previous years, you would know the pattern of income. Determine the average and know how much roughly your target is for spending. It is always best to keep the expenses 5-10% below the estimated average income. Better to underestimate and use caution and discretion.

Estimate Cash Outflow:

This is the most important part of budget. Income may be irregular, but many expenses are regular. List all expenses - better make two lists. Things like rent/mortgage, food and grocery expenses, utility payments like power, telephones, transportation expenses, loan and credit card repayments and taxes & investments which have to be met and another list for discretionary items like cable bill, club fees, and holiday plans etc that can be cut off if needed. Write down exactly when all the mandatory payments are due so you will have an idea how much you may need, when and for what expenses.

Establishing a cushion fund:

If there is a cash-flow problem at times due to income being less than average, you will need to establish a safety cushion of cash to meet the lean-month expenses.  It can be quite challenging to build nest-eggs for cushioning initially, especially when average income is low enough. But setting aside regularly 5% of the income will help build the cushion fund slowly albeit but surely. A minimum 2-3 months worth expenses should be at least available in the cushion fund to tide over lean periods.

Also it is wise to set aside some cash for emergencies as well. This should be touched only for a real emergency like medical expenses.

Tips for managing funds:

  1. Keep it simple and easy to follow.
  2. Base the budget on the lowest monthly income of previous year.
  3. Keep it flexible so essential expenses are met.
  4. Be alert to check for cost overruns which must be corrected and prevented. If food expenses overrun despite best efforts, then other expenses must be curtailed for compensation.
  5. Avoid debt. A good budget should cover real important expenses.
  6. Assess and prioritize your expenses. Important-looking expenses may not be really important.
  7. Save, and save for the cushion fund to build up.
  8. Establish a high-interest savings account. All bonuses/additional incomes should go directly into it and not be splurged.
  9. Give your budget time to work.

Planning and adhering to a budget will make irregular income look like regular income and you may be pleasantly surprised to have a surplus than deficit in your funds.

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