Are you overestimating your income when budgeting!

Case 1

Situation: My business is seasonal, and payments usually take two to three months to come through. I earn well from March to October and have about three to four months of low business. How do I ensure my family’s expenses are always taken care of?

Tried and tested solution: It’s fairly simple – start paying yourself a monthly salary!

Step 1 - Calculate the minimum amount you need to pay for your family’s most basic, essential expenses – rent, EMIs, groceries, children's school/college fees, utility bills, transportation, etc.

Step 2 - Calculate the minimum amount you need to pay for the ‘wants’ of each family member – entertainment, dining out, mobile plans, Wi-Fi, etc.

Step 3 - Include the minimum amount you must save each month to achieve your current short-/mid-/long-term goals – gifting your daughter a bicycle, buying a new fridge by Diwali, saving for your child's education, a bigger house, or retirement, etc. Add the above expenses to know the total amount you need to take care of your monthly expenses.

Step 4 - Calculate the minimum income you can expect in different months by looking at your business’ balance sheet for the last six to nine months.

Step 5 - Calculate whether your expected expenses can be covered with your expected minimum income. If not, cut down on the least important expenses.

Step 6 - From your business account, pay yourself a salary at the beginning of each month to cover all the essential needs and some wants.

Step 7 - This way, during the high earning months, you can amass enough savings to survive the low earning months and even invest some of it back into your business.

Pro tip: Once you’ve saved a substantial amount, start setting aside some money every month to build an emergency fund to take care of your expenses during unexpected situations such as a medical emergency, loss in business, etc. Don’t forget to get medical and life insurance plans to further safeguard your family against emergencies. To understand more, read our article on paying yourself first.

Case 2

Situation: My income varies depending on the number of hours and clients I work for. I excessively depend on my credit card and take small loans for irregular purchases. Is there a way for me to manage my expenses on an irregular income and avoid piling too much debt?

Tried and tested solution: Follow these steps to budget on an irregular income:

Step 1 - Calculate the minimum amount you need to pay for your family’s most basic, essential expenses - rent, EMIs, groceries, children's school/college fees, utility bills, transportation, etc.   

Step 2 - Calculate the minimum amount you need to pay for the ‘wants’ of each family member – entertainment, dining out, mobile plans, Wi-Fi, etc.

Step 3 - Include the minimum amount you must save each month to achieve your current short-/mid-/long-term goals – gifting your daughter a bicycle, buying a new fridge by Diwali, saving for your child's education, a bigger house, or retirement, etc.   

Add the above expenses to know the total amount you need to take care of your monthly expenses. 

Step 4 - Calculate the minimum income you can expect in different months by looking at your monthly earnings from the last six to twelve months. When budgeting with an irregular income, it’s best to consider the minimum income rather than an average, as you can always add to this amount when you earn more.  

Step 5 - Calculate whether your expected expenses can be covered with your expected minimum income. If not, cut down on the least important expenses.

Step 6 - Keep at least two bank accounts – one each for savings and expenses. Whenever you earn more than your expected minimum income, keep the extra funds into your savings account. Then, use it to repay debts faster, build or replenish your emergency fund, or to save more towards a goal.

Step 7 - When budgeting with an irregular income, your budget may have to be re-adjusted based on each month’s earnings.

Step 8 - Treat yourself every time you reach a milestone or set aside some ‘me money’ for discretionary expenses, as this will keep you motivated to stick to your budget.

"Work is a sure-fire money-making scheme." - Dave Ramsay

Pro-tip: To achieve your goals sooner, and become more financially independent, find ways to earn more money. Never rely on a single irregular income, invest to create additional sources of income, learn new skills, etc.

Case 3  

Situation: I have a fixed salary. I also get quarterly and annual bonuses based on my performance. Can I add these extra earnings to the monthly income I budget with?

Tried and test solution: Your monthly salary is fixed, and the bonuses are irregular incomes you earn every three months and once a year. Try dividing any irregular extra funds using the following steps:

Step 1 - Your monthly budget should be created basis your fixed income – your monthly salary.

Step 2 - Make sure you record all your expenses – essential and non-essential. Check whether your monthly income can cover them.

Step 3 - If your expenses cost more than your fixed monthly income, identify non-essential expenses that can be cut down to accommodate the most important expenses within this income.

Step 4 - Consider your bonuses as extra funds of the months in which these are earned. Use these to clear credit card bills, pre-pay a loan, replenish your emergency fund, or to save more for a goal.

Step 5 - Set aside 10% of your income to spend on anything you wish to.

"If you want something you've never had, you'll have to do something you've never done." - Dave Ramsay

Pro tip: Instead of taking loans, save up for your goals. When you build a considerable savings corpus, invest some of it to make your money grow.  Read more on where to find extra money you can save to add to your budget.

Remember, if you overestimate your income you may end up in any of the following situations:

• You may struggle to even pay for basic monthly expenses.
• You may end up with no funds to pay for your expenses during unforeseen situations. 
• You may pile up more debt than you can comfortably repay.
• You may fail to achieve your financial goals.