Okay. So last week we discussed the importance of consistently using a zero-based budget. Click here for a review of the article. This week, we will break down how to budget irregular income.
What is irregular income?
Irregular income is income that varies from month to month. It may vary by amount or it may vary by availability.
The amount may vary if you work overtime and the number of hours available each week changes. It can also vary if you work on commission.
The availability may vary if the income is not accessible every month. Examples include bonuses and tax refunds.
If you have irregular income, a budget is a must!
How do you budget an irregular income?
Now that we know what irregular income is, how do we budget it?
I was a Sales Director with Mary Kay Cosmetics for 10 years. For seven of those years it was my only source of income. I will use an average month from my time as a commission only salesperson to illustrate how to budget irregular income.
Note: I did not know what I'm about to share with you when I was a Sales Director with Mary Kay Cosmetics. Had I known then what I know now, chances are good my career would have taken a different path.
Irregular Income Scenario:
My average monthly income from training consultants was about $3000. I received a portion of my income on the 1st of the month (around $500) and the rest of my commissions were available on the 15th of the month. I averaged about $3000 in product sales each month, which generated a profit of $1500. So my average available income for the month was around $4500. Let's set the monthly expenses for this example at $4000.
Are you ready? Here we go!
1. Budget what we know. In this example we know we will receive $3000 in commissions. A portion will be received on the 1st of the month and the rest will be received on the 15th of the month. We will treat the $3000 as regular income, since we know when it is coming and how much will be received.
2. List out expenses on the zero-based budget. We know our base monthly pay won't cover all of our expenses. We'll use the zero-based budget spreadsheet to manage the first $3000 of expenses. Refer back to my article on zero based budgeting to review. Click the purple button to download a copy of the zero based budget.
3. Complete the irregular income form. (Click the green button for the form.)
Move the rest of the expenses to the irregular income form. We have estimated that we'll receive $1500 profit from sales, but we don't know when it will be available for us to spend.
As a result, we will list the expenses on the irregular income form in the order of importance to ensure we have enough money to pay for them.
4. Spend all of the irregular income. As the money from sales comes in, pay the next item on the list. Keep working until all of the sales income is gone. If you work through the entire list and you still have more money, add more expenses to the list!
Remember...we must spend every penny.
An extra payment to a creditor or a nice chunk of cash towards a future purchase are great options here.
IMPORTANT: If you don't have enough cash to work through the entire list, STOP SPENDING UNTIL YOU GET MORE INCOME! Transfer any remaining expenses to next month's irregular income list. This is why you put the most important items at the top of the list, regardless of the amount.
See the example below for a visual explanation.
And that's it! You just finished your first irregular income form.
Habakkuk 2:2-3 says “Then the Lord answered me and said: “Write the vision and make it plain on tablets, that he may run who reads it. For the vision is yet for an appointed time; but at the end it will speak, and it will not lie. Though it tarries, wait for it; because it will surely come, it will not tarry."
In other words, create a budget for the money you know. Create a PLAN for the money you don't know. When it does show up, you will then be able to use it wisely. AMAZING!
I hope this was helpful.
Have you used an irregular income form before? Feel free to share your experience. If not, what's holding you back?
Would love to hear your thoughts.
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Until next week...be well...be encouraged.