While budgeting is recommended for all who wish to stay on top of their
money and avoid overspending, it is especially important for those who do
not know what number will appear on their next paycheck. Whether you have
been balancing a fluctuating income for years or are experiencing a
financial impact from COVID-19, there are five steps you can take to
ensure that your spending habits are stable, even if your income is not.
- Estimate your lowest monthly income - when
constructing a budget for the first time, it is easier to start low
than to start with an idealized number, because you can always go
up. To determine your lowest possible income, review previous pay
stubs and find the lowest net amount paid. If this is your first
time experiencing a fluctuating income, estimate what you think your
lowest month might look like.
- Calculate your fixed, organic and discretionary expenses
- now that you have identified your lowest possible
monthly income, it is time to write out your monthly expenses. Start
by listing your fixed expenses (rent/mortgage, insurance, savings
goals, debt payments). Then move to organic expenses (food,
utilities, transportation). Finally, end with calculating your
monthly discretionary expenses (entertainment, dining out, streaming
services, etc.). To better estimate your expenses, reference your
last few months of bank statements and credit card bills. Remember
to satisfy your needs, not your wants.
- Take your budget for a test drive - to
see if your newly created budget is livable, test it out the
following month. The keys to success with budgeting on a fluctuating
income are to be flexible, to stay on top of your spending, and
adjust your budget in accordance with how much money you bring in.
- Create a Hill and Valley fund - with a
fluctuating income, there will be months where you bring in more
(hill) or less than average (valley), so to avoid pulling from your
savings account or emergency fund, create a Hill and Valley fund. A
Hill and Valley fund acts as a buffer to help you pay your expenses
when your monthly income is lower than expected. To create a Hill
and Valley fund, allocate extra money from particularly lucrative
months directly into the fund.
- Be patient and give yourself grace - experts claim
that, on average, it takes an individual three months to become
comfortable with budgeting, regardless of the stability of their income.
So with that being said, be patient and do not get discouraged if
balancing your expenses into a budget takes longer than expected or if
one month, you find yourself spending more than you planned. Do not give
up. Budgeting takes time to get right, so just keep going!
Learning to budget on a fluctuating income not only lets you know where
you stand with your money, but it also provides you with the power and
peace of mind of knowing that you are in control of your money – rather
than your money being in control of you. If you have further questions
regarding how to budget on a fluctuating income or concerns on how
COVID-19 may affect your financial future, consult one of our financial
experts at North Dallas Bank today.
Visit www.ndbt.com for
more info. Member FDIC.