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Whether you're in a sales or commission-based role, self-employed, run a small business, or are employed in some similar line of work in which your income may fluctuate, it isn't always easy dealing with an irregular income. The ups and downs of your monthly paychecks can make it difficult to budget and try to plan ahead when it comes to your finances. However, if you take some time to gauge a few facets of your finances, you may keep an unsteady income stream from rocking your financial world.
Taking an Average
It can take some time, but coming up with an average monthly estimate of earnings can help put you on course for better handling irregular income. We're talking about a time frame of months here, so it isn't a quick fix, but if you're able to track income for a good four months of so, you should be able to begin to get an idea of what you're averaging income wise.
Even extreme fluctuations can be broken down to an average. If one month you're bringing in $4,000, with the next month only $400, then back up to $3,000 the following month, with a downturn to $1,000 the month after that, you'll begin to find that you're averaging around $2,000 a month.
Estimating Low on Income
Personally, I prefer to guess a little low on my average income estimates. This way I give myself a buffer against unexpected shortfalls. It's not that I want to earn less, it's just that if I estimate a lower income amount, I tend to restrict my spending a bit more and plan ahead in advance for a tighter than expected budget.
Erring on the side of safety is just another way of protecting my finances against unforeseen issues that might arise during those times when income is at a premium or expenses are more than expected.
Of course, if that $2,000 a month average is pre-tax, you might not actually have the full amount to spend, so making an adjustment for taxes on that amount can help you get a better feel for what you actually have to spend. In this case, you might call it $1,500 a month.
When coming up with expenses, it might be a little easier than with a fluctuating income, since many bills are sent on a regular basis. Utilities, rent/mortgage, health insurance, food, transportation, and the likes, will remain somewhat stable for most people. Yet, items like car insurance, quarterly or annual income tax payments, property tax bills, and similar bulk payment items could mean you have to take a similar approach to estimating your average expenses over time as you would your income. This way, you can begin to compare average income with average expenses to determine how they match up.
Saving is Crucial
But just because you understand where your averages lie, it doesn't necessarily mean that they'll match up each month. Pairing a down income month in which you only earn $800 with a high expense month of $3,000 in which you might have a property tax bill and insurance premium due, could leave you hurting for cash.
This is why it can be so important on those high income months not to over spend, and instead, stash the bulk of your excess income into a liquid account where it is available to cover the shortfalls on certain months. Then, once you've built a reserve fund to cover those shortfalls for a couple months, and begin to get a better feel for your income and expense swings, you might be able to branch out and spend a little more or put money into less liquid assets or investments.
Sticking a bunch of cash into the stock market or investing in a new vehicle, only to have to cash it out two months later because you don't have enough money to pay the rent could have you needlessly suffering significant losses.