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Irregular Incomes

on March 18, 2014

This post is part of a budgeting series. See All the steps below:

Budgets, Where To Start?
The Other Half of the Budget

The Nitty Gritty

Budget Deficit

Cutting Your Grocery Bill

Keep Those Dollars In Your Pocket
I Need Extra Income


coffee
Photo Credit: anieto2k via Compfight cc

Have you been looking at this budget series lately and thinking “That’s great, but it won’t help me; my income is unpredictable”? Do you work off commission or freelance?  Do you work a job that gives you an unpredictable range of hours from 30 hours one week to 10 hours the next? Then this post is for you!

Now, this post will require you to look back at your income for the last six to twelve months. You can get this by looking at your paystubs, or bank statements (if all of your paychecks deposited into your bank account). Now, add up how much you were paid each month. We’ll use an example here to help you understand, let’s name the example George. Our friend George works for a base pay and earns extra in comission each month. Let’s say the following is George’s income totals for the past six months:

September – $2700

October – $3200

November – $3000

December – $4000

January – $2500

February – $3500

Now, it looks like George had a few low months in September and January, but he had some high months in February and December. You may think George will want to budget based on the average of these months, but actually, he will want to budget based on the LOWEST AMOUNT he made in any of the the last six months (or up to a year if you have records back that far). You may be asking “Why shouldn’t I just budget based on the average?” But what if in January, George had planned his budget based on the average? He would have been planning on receiving $3150 (the average of the months listed), but he only received $2500. THAT IS A DIFFERENCE OF $650! Six hundred and fifty dollars!! That is a large difference. What if early in the month, George had paid extra on his credit card bill, expecting to make $3150, but instead, is left at the end of the month unable to pay his electric bill!?

Now you may be asking, what if my budget doesn’t work when I make the smallest amount? In George’s example, that would be $2500. You will need to categorize your expenses. First, plan on paying the necessities of food, and shelter. This includes mortgage/rent, electricity, groceries, heat, water and any other expenses that you deem necessary for your family. Second, list the extras, including eating out, credit card payments and any expenses not deemed necessary. You will have to number your non-necessary expenses in the order of importance that they need paid. Now let’s go back to George’s example. He wants to create his budget for next month.

Here are George’s necessary expenses (Some may seem off, but I am just trying to keep the math simple):

Rent – $500

Groceries – $300

Electricity – $50

Gas/Heat – $100

Water – $50

Car Payment – $300 (To some this may seem unnecessary, especially if you have paid of your vehicle, but George hasn’t yet. His job is 30 miles away and there is no public transportation in his area. He would be unable to make an income if he didn’t have this car. For him, it is a necessity, you will need to decide if it is for you.)

Vehicle expenses (Gas, Oil Changes & Maintenance, Auto Insurance) – $350 (He has to keep gas in his car and keep his vehicle properly maintained in order to make it to his job, which he needs in order to make an income.)

Necessary Expenses Total – $1650

Now here are his non-necessary expenses:

Student Loans – $300

Credit Card – $150

Eating Out – $300

Cable/Internet Bill – $150

Cell Phone Bill – $100

Entertainment (Movies theaters, movie rentals, date money, attraction entry fees, etc.) – $150

Gift  (George’s mother’s birthday falls next month, and he wants to buy her something) – $50

Non-necessary expenses total – 1200

That makes the total of George’s expenses $2850. That makes it $350 over his budget of $2500. He will need to decide how to organize his non-necessary expenses. He decides the following importance (1 being most important, 2 slightly less important, etc.):

1. Cell Phone Bill – He uses his phone to stay in contact with family & friends, as well as work clients, so he wants to keep that bill paid.

2. Cable/Internet Bill – He uses his internet to keep up on articles in his field and interact with work clients. Since his internet is bundled with his cable, he will pay the entire bill.

3. Student Loan – He doesn’t want to default on his loans, so he’ll pay this one.

4. Eating Out – He often eats out at work or with work clients, so he will keep some money in this budget. But, he will try to cut it down to $200 for the month instead of $300. He also discusess with his boss the possibility of company reimbursement when he eats out with work clients. They agree to pay $50 a month, which brings his need in this category to $150.

5. Credit Card – He is trying to pay off his debts to become debt free, so this one will get paid as well.

6. Entertainment  – This isn’t quite as important as other categories, so it is towards the bottom

7. Gift – Gifts aren’t vital to  his life, so if needed, he could cut them out.

Now with his non-necessary expenses in order, we see that after George pays his  bills in order, once he payshis credit card bill, he is out of money. So next month he will plan on not spending money on entertainment or gifts. He decides to cook his mother dinner at home instead of buying her a gift, since he can’t afford it this month.

Now George is ready if he only makes $2500. But, if by the end of the month, his income is higher, he can then decide to buy his mother a gift, spend money on entertainment, add money back into his eating out budget, or even set the extra aside to pay extra on his debts (student loans, car payments or credit cards), or put the extra in savings.

If you have more expenses left over after this process than George did, you will have to decide if you can re-arrange other expenses like George did with his eating out budget, or if you need to call your other billing companies and request a smaller payment for this month. As long as you are willing to pay something, most companies will work with you.

So, if you have an irregular income, does this help you? How do you plan your budget? What did you find most helpful? What do you wish I would have covered?

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