Many people have a hard time budgeting when they are on a fixed income. But one advantage of a fixed income is knowing what to expect. With an irregular income, it may be harder to predict what is coming. Sometimes business is good, and sometimes the money just doesn’t come. While you could simply alternate states of financial euphoria and panic, it may be better to stick to a regular budget that will support both situations. Without a budget in place, many people wind up turning to short term financing situations, such as payday loans or other business loans. They also may skip payments or even get behind on important bills such as rent leading to fees, extra interest, and a blow to their overall credit worthiness.
Most people have a varied set of bills. Some of these are top priority fixed bills, such as the rent or mortgage payment, car payment, and utilities. Others are more flexible, such as credit card payment and money for food and clothes. Whether you have an irregular income or a fixed income it is good to make a list of all financial obligations. The most stringent should be at the top of the list with things like buying new clothes or entertainment money being at the lower end of the scale. By doing this you can determine how much it will take to cover basic needs, secondary needs, and extras.
For those barely making ends meet, it may be necessary to devote nearly 100% of their budget towards their basic needs. However, most people should be able to develop a budget that calls for a different ratio that allows for more flexibility and occasional extras. A good goal to shoot for is 50% on basics, 30% on secondary needs, and 20% on extras.
The longer you have been living off an irregular income, the easier it will be able to determine a good ratio when it comes to budgeting your money. If possible, look at your typical monthly income over the last year. If your income has not been irregular for that long go back as far as you can. Take your full year income and divide it by 12 to get your average monthly income. If there’s fewer months divide by the number of months. Once you have your average income figured, try and base your budget on a figure at least 10% less than your expected income. If you have a limited amount of months to reference, you may want to make your budget as much as 20% less if you can to allow a margin for error in case your income does not reach the levels you expect. This is the amount you should set aside for your bills.
If your average income is $2000 per month, ideally, your budget should fit into $1800. There will likely be months that you make more than this, and it can be very tempting to splurge on a treat or even pay off a credit card. While this is a great thing to do on a fixed income, when you get an occasional opportunity for overtime, on a truly irregular income you want to exercise caution. Instead, put the extra money in a savings account or a low risk money market account. That way, if there is a slow month where your income is much lower, you’ll have money of your own to draw from rather than relying on short term loans just to make ends meet. Work on building your savings to a typical month of income. If you manage to save even more, you can consider investment products that will make additional interest, or add extra money to a retirement account.
Developing and sticking to a budget takes time, discipline, and at times a good deal of tweaking, especially with an irregular income. But by giving yourself a better view of where you stand financially, you’re more likely to stay more calm and productive overall.