How are commission-based salespeople, freelancers and many others who are never 100 percent sure of their income supposed to keep a household budget? Today you will learn just that.
To start with, let me emphasize that these are methods that are fully proven in practice, not theory. I have been keeping my household budget based on irregular income for years. Neither I nor my wife have ever been employed under an employment contract. Therefore, I am fully convinced that this system simply works.
How do you determine irregular income?
With varying earnings, you don’t know what amount to include in your budget. This is perfectly normal. After all, you are not a fortune teller. However, there is a simple solution. For this, you need the history of your earnings from the last year, or preferably several years.
Even if you haven’t kept a budget until now, that’s okay. All you need to do is review the history of the bank account to which you have been receiving your income. Write down all months and the corresponding amounts. Don’t do it on a piece of paper, use Excel. You’re about to find out why.
By the way, you’ll see if your salary is holding steady or growing, and if so, at what rate. If you earned 45k zlotys last year and 42k two years ago, did such an increase beat inflation? Earnings increased year over year, but was the increase comparable to the increases in previous years? It’s a time for reflection that often gets lost in the gray mass of daily ASAPs, tasks and KPIs. Now you can look at your job and decide whether it’s worth asking for a raise or looking for a new one.
Average annual income
I suggest you the simplest way I’ve used myself so far: count your entire net income from the previous year and divide the result by 12 months. This will give you an idea of the amount you have available each month. If your salary is similar each month and there are no major deviations, then this method is for you as well. To be safe, you can divide your annual income by a larger number, such as 15. By doing so, you will maintain a greater margin of safety in case of a worse period.
In addition to determining the amount of your maximum expenses, you also have a reference that shows you how much you should be earning per month. If you stick to the average, you’re fine, and every better month will be extra income. However, do not use these funds for additional consumption. Remember, we set these levels for your safety. If you are earning more and more year after year, also check to see if your current earnings growth matches your past earnings growth.
This method assumes that your earnings are fairly stable, which is subject to some error, making it not as safe as the second version below.
Minimum monthly income
The second and much safer way. Again review the entire previous year and find the month in which you earned the least. From now on, this is the maximum amount you can spend. In case your income fluctuates between e.g. 3,500 and 6,000 zlotys, you assume that you earn only 3,500 zlotys each time.
You set aside any surplus to hedge against months with low or no earnings, if the possibility exists for you. If you consistently earn more than the minimum, you’ll quickly build a financial cushion.
What happens when temporary expenses exceed earnings? Nothing bad. Don’t panic, that’s the assumption. By following this rule you are protected not only from this but also from lifestyle inflation, which you will read about in the next material.
How to keep a budget with irregular income
Once you’ve determined which of the above methods you’re going to use, it’s time to review your expenses. Firstly, take care of only the essentials – rent, bills, food, health and hygiene, and commuting. Your minimum income must cover your minimum living expenses. There is no exception to this.
If you have debts, such as a mortgage, your average income should easily cover them. With a minimum income, it may not be that easy, so set aside every surplus for this specific purpose, for example as part of an earmarked fund I wrote about previously.
Anything you earn over that limit, allocate at your discretion to savings, entertainment, etc. If, on the other hand, you have nothing left, or worse, you are short of money, it’s time to review your expenses more closely. Irregular earnings are characterized by better and worse periods, and this is associated not only with an improved standard of living but also with a willingness to lower it when necessary. Maybe it’s time to cut back on going out to clubs, new gadgets or clothes, or maybe it’s time to roll up your sleeves and look for a source of new income?
The biggest problem of irregular earnings
I don’t want you to just keep saving and worrying about tomorrow. That’s how you end up as a frustrated scrooge with depression. I want you to enjoy life because there is nothing wrong with rewarding yourself for the discipline. They say the longer you wait, the better the reward tastes. At least that’s what the principle of delayed gratification says.
I just want you to do it wisely and stay safe. Rational judgment and quick response can prevent disaster. Being too lavish with your finances and overestimating your earnings in better times has already brought many people down and made them politely retract. Believe me, this applies to everyone – the corporate employee as well as the corporate owner. This is how lifestyle inflation works – but you’ll read about it in the next material.
