Oran Hall | Mastering the art of budgeting on irregular income

It can be challenging for people who do not earn a consistent stream of income, because of self-employment, seasonality of employment, and commissioned-based employment, to manage their money effectively, but there are practical budgeting techniques and strategies that can be employed to smooth out financial ups and downs and bring about effective cash flow management and financial stability.

People like some tourism workers, sales men and women working on commission, entertainers and sports people, for example, whose income fluctuates from period to period, can use tools such as budgeting, income smoothing, automatic savings, expense tracking, setting up an emergency fund, account structuring, and effective goal-setting, to master the management of their money.

Although there are apps which can aid in managing the inflow and outflow of money, people can devise their own means of doing so, although it may prove tedious.

Whatever means is used to create a budget, only money that is earned or guaranteed should be allocated for spending, which should be tracked closely and put under clear headings to help determine the categories of spending which are having the greatest negative and positive impact on the budget.

An effective budget can help to create a buffer between high-income periods and lean periods.

Determining patterns in relation to peaks and valleys in the inflow of income is critical, as it can help in the smoothing out of income. Knowing how income has flowed in the past can help in predicting future earnings. It makes it easier to anticipate low-income periods and plan accordingly.

It is a good practice to calculate the average monthly or periodic income from the past and to make a budget based on that average, setting aside surpluses from high income-earning periods to cover shortfalls in the weak months.

Automatic savings are key. Ideally, such savings should be a percentage of income in the good months and the bad months. They ensure that there is constantly a cushion to soften any decline of income and that there is money to carry on normal family activities and to take care of emergencies.

Automatic transfers should be made to an interest-earning account that is easily accessible, for example, a money market account or an income account, both of which pay more realistic rates than savings accounts. Overall, automatic savings help to keep income organised and intentional.

Tracking expenses is also vital to the effective management of financial resources, especially so when income flows are irregular and uneven. When spending is categorised and monitored, it creates scope to identify areas in which spending can be reduced, especially in the low-income months, and raises the chances of living within one’s means.

To aid in managing expenses, it is good to know the different categories. Required expenses are the core expenses for maintaining one’s basic lifestyle. They include the cost of accommodation, food and utilities. Discretionary expenses are those that can be reduced or eliminated without seriously impairing one’s lifestyle. Examples are entertainment and gifts.

Recurrent expenses are incurred regularly – monthly or weekly – unlike periodic payments, such as school fees, which fall due every term or semester, and motor insurance premiums, which may be paid quarterly, semi-annually or annually.

Fixed expenses remain the same for a relatively long time, for example, rent and mortgage. Variable expenses change from period to period, even if they are also required expenses such as food. They and discretionary expenses allow the highest level of flexibility and control.

An emergency fund, also called a rainy-day fund, of three to six months of living expenses is a solid buffer to cover slow periods or unexpected crisis situations. Such funds should be easily accessible and income-earning.

It is generally not a good idea to lean on credit cards and other forms of debt in such situations, unless, of course, funds are available to pay the bill in full and on time.

Where there is more than one income source, it is important to identify each very clearly, to be clear about the level of contribution that each source makes to total income, and to make the major source as secure as possible.

One very important advantage of having a spending plan is the clear and organised structure it creates. It identifies income, savings, debt servicing and all classes of daily expenses. It facilitates allocating money to specific purposes and reduces the risk of accidental overspending.

Goalsetting should be at the forefront of any spending plan. By setting out what is to be achieved, when, and at what cost, it sets the path for clear, achievable financial goals and how much is to be allocated to each.

This helps to instil discipline and keeps motivation high, even when income is unpredictable. With the end always firmly in view, it makes it easier to manage the peaks and troughs better, and makes a more predictable financial journey.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com