Kolkata, October 18: Budgeting is one of the first steps to planning your finances, as any financial planner will tell you. While it takes discipline to create a budget and stick to it, it is even more difficult for those having a fluctuating income. This would refer to professionals or businessmen who do not have a regular salary. In some months the income might be moderate, in some months it can be really less, while in other months there may be a windfall. But there is no way one can predict a fluctuating income, so that needs to be kept in mind when budgeting. Here are four steps that will help you create a budget if you have a fluctuating income.
Calculate your bare minimum expenses: When budgeting with a fluctuating income, you need to first have an idea of the bare minimum money you spend every month. This is easy to calculate as you need to include essential expenses like groceries, rent, EMIs, school fees and so on. This step lets will help you know what is the minimum amount of money you need to get by every month.
Get an idea of your discretionary spending: The next step is to get a fix on your discretionary spending. These would mean expenses like eating out or entertainment that can be done away with if required. Calculate your discretionary expenses over a period of 6 or 12 months and get an average.
Consider your lowest monthly income: Calculate your total income over the last 12 months and divide it by 12 to arrive at an average monthly income. However, when budgeting, you need to consider your lowest income in the last 12 months. This would mean that you will have your major costs covered even in the worst of months. Remember, if you can budget according to your lowest monthly income, every time there is a good month you will have extra cash in hand. This you can use to perk your emergency fund as we will see in the next step.
Budget accordingly: As we have seen, you need to budget according to your lowest monthly income. That should cover your bare minimum expenses plus your average monthly discretionary expenses. In case you are falling short, you need to first attack the discretionary expenses and see how you can cut down. Try to ensure that your total monthly expenses do not exceed your lowest monthly income. Even if this is not possible, it should not exceed it by too much. What you are doing is essentially preparing for a worst case scenario. Anything income over your lowest monthly income in the previous year will stand you in good stead.
Build an emergency fund: Emergency funds are a must for everyone and it is even more important if you have an income that varies, ideally, you should have an emergency fund that is 6-12 months of your monthly expenses. Whenever, you have a good month, do not spend the extra money but make it a point to put it away in your emergency fund. An emergency fund will help you get through periods when your income is lower. Remember that an emergency fund is for an emergency, so you should use it as your last resort.
Budgeting with a fluctuating income is certainly not easy. But prudent planning can definitely make life easier.