Video Transcript
Hey Tammy here!
So I’ve talked a lot about budgeting and you may be thinking “Well Tammy, that’s all well and good if I have a set income every month (if I make the same amount of money), how do I budget if I have an irregular income or fluctuating income?” Well surprisingly it’s not that different budgeting on an irregular income as it is on a set income. There are just three tweaks you need to think about in your budget. The first one is you need to figure out how much to even include in your budget for your expenses. Second thing is you want to rank your expenses. And third thing is you want to create what’s often called a “hills and valleys fund”… don’t worry I will explain what all three of these are.
So the first one is figuring out much do you include in your budget? If you have a different income every month and you don’t necessarily know what it’s going to be how do you even create a budget on an income like that? There are two situations you might find yourself in… the first is that your income from year to year is kind of consistent but it fluctuates from month to month. For example, you make about $60,000 a year; you made that this year, last year, the year before that. Now within that year and from month to month your income may fluctuate, but usually by the end of the year you make about $60,000. In this situation what you do is you take your $60,000 and divide it by 12 and that is a number that you will use to create your budget (or spending plan).
Now the other situation you may find yourself in is you may have a crazy fluctuating income and you have no idea what your income is going to be from month to month, or from year to year. So how do you budget on something like that? What you want to do is look at your income for the last two or three years and see what the range of your income has been. Look at the low income to high income and think about the future, and look at the low-end and ask “what do you I think is the lowest income I might expect to have in the next month or year?” and then budget based on that low number. And make sure that low number includes all your must-have expenses (all your most important expenses). And then you can have some “nice to have things” outside of that for the months when your income is higher.
Which leads into the next tweak… the importance of ranking your expenses. On a fluctuating income you want to rank your expenses from most important to least important. Because what can happen on a fluctuating income is you have your income and you start paying your expenses and at a certain point you run out of money… so what you do is you have to draw a line in your budget and everything above that line gets paid… and everything below the line is not going to get paid! You want to make sure that everything above the line is your most important things, like your food, your housing, your transportation, and everything that you consider to be important and that must get paid each month you want to be “above the line”. And then below the line will be your nice-to-have expenses. So it’s important to rank them.
Which flows into the third tweak… you want to have a hills and valleys fund, which is money you set aside in the months where you have more income to cover the months when you have less income. An example of how that works is let’s say you have $5,000 of expenses a month but you make $6,000… that month you pay all your expenses and you have thousand dollars left over! What do you do with that thousand dollars? You set it aside for a month when you’re going to have less income. Because maybe the next month your income (instead of $6,000) will only be $4,000… you still have $5,000 of expenses but only $4,000 of income… you pay all your expenses and you’ll be short $1,000 so what you do is you go into your hills and valleys fund and you take that thousand dollars and now you’re able to cover off all your expenses for the month. So that’s how a hills and valleys fund works.
On an irregular income the three things additional things you want to consider are:
1. Figure out how much you’re going to budget each month
2. Rank your expenses, and
3. Create a hills and valleys fund
If you have a questions about that feel free to get in touch!
Otherwise that’s it for now!