Budgeting on an Irregular IncomePublished on 2021 | 07 | 30
There is that 'B' word...budgeting.
If we are honest, very few people actually enjoy budgeting. We may have an idea of what we need to pay for and when we need to pay for it, but the idea of putting that onto paper, or app or spreadsheet month after month may seem like a long arduous task.
While we may associate budgeting with boring, there is no denying the need and benefits that come with it. And because it is one of the pillars of personal finance management, it is worth befriending it. Today we look at how you can make budgeting your friend when you have an irregular income.
1. Know Your Expenses - literally list down all your expenses. Break down your expenses into fixed expenses (e.g rent, utilities) and variable expenses (e.g. grooming). For purposes of budgeting, savings and investments should be line items in your expenses.
2. Highlight the "must meet" expenses. There are certain expenses that you just have to meet, come rain or shine e.g. rent. Total these up.
3. List down the income you are expecting this month. Are there invoices that shall be paid this month? What does your sales pipeline tell you? Be very realistic with this.
4. Look historically. Over the past 6 months, how much of your expected income did you actually receive? If you are in self-employment you know that at times invoice payments may prolong. If you notice on average, for instance, you only actually receive 70% of your expected income, then work with this average for your budget. For example, if your expected income for this month is KES. 100,000, for purposes of your budget, work with an income of KES. 70,000.
5. Allocate your income first to the "must meet" expenses.
6. If you have an income "balance" , allocate the remainder to the other expenses based on where they rank from a priority basis.
7. Make sure you allocate every shilling to an expense.
What if I collect more than I have budgeted?
This is great! Congratulate yourself, maybe even reward yourself, but be forward looking. Because your income is irregular, consciously allocate the extra income to the next months' must meet expenses. This will help you stay afloat in months when your income drops.