Many people today are not on a standard salary or earn a regular monthly income. They survive on irregular sources of income like sales commission, money from self-employment, consulting charges, cyclical sales etc. Since they do not know how much they will get every month, managing budget becomes a challenging task. But where there a will, there is a way. Managing irregular income is difficult but can be done with a clear plan. Here are a few tips that may help you if you are in this sort of irregular income cycle:
1. Budget based on lowest monthly income: Budgeting based on your average monthly income from the past twelve months can be tricky. The average number is not really one month’s income, but a statistical measure. For instance, if you earned Rs 25,000, Rs 12,000, Rs 20,000 and Rs 17,000 in 4 months, the average monthly income would be Rs 18,500 — a figure you have never earned actually. This is more realistic to base your budget on your minimum monthly income (from the past 12-18 months). Using the minimum monthly income, say Rs 12,000 in the above example, gives you a safety buffer. When you have irregular income, a safety net is crucial.
2. Jot down your minimum expenses: Since you have budgeted your lowest monthly income, now it is time to know what your most fundamental expenses are. The harsh truth is that despite not earning a fixed sum on a monthly basis, you will have some fixed monthly expenses. The fixed nature of expenses is the biggest challenge with irregular income situations. Due to invoicing and 45-50 days of credit given to your client, money may not be coming in on a particular month. However, you will need to eat (food cost), live in a place (rent), commute (transport cost), and use water/electricity/internet (utilities) — all of these charges have to be paid monthly. Add up these amounts and arrive at a figure. This is what you need to sustain yourself every month.
3. Avoid over-spending when you get paid: Since your income is irregular, it is easy to get excited when you are paid. Just because money has come into your bank account does not mean you will spend all or a big proportion of it. Tell yourself: “This is not the time to treat myself.” Any temporary liquidity is like oxygen in a polluted atmosphere. Spend money only when you have to. This means cutting back on some of the most basic desires. If you have jotted down your minimum expenses, you will know what that incoming money means to your monthly budget. Since you don’t earn income every month, spend money only on basic expenses first. Do not use the money to upgrade your phone or go on a shopping spree or hang out with friends at a pub. You can control your spending by ensuring that most of the money is not in one account, but in two. In this way, you can track your income in one account and spend from another account to enable easy monitoring.
4. Pay life and health cover premium: While your income may be irregular, medical ailments, accidents, and any untoward health development will not come with a warning. If you have dependents, take an adequate term life insurance policy to secure your dependents’ future. The health insurance policy, with preferably cashless disbursal, will ensure that you will not need to fork out much cash in case of any hospitalization. Do not stop paying these two premiums. They are extremely vital to financially safeguard your family, especially during an unfortunate situation. Take policies with basic sum assured, and depending on your income trends try to get bigger protection when you can afford to. There are some single-premium life insurance policies that are suitable for those who can buy pay many premiums at go depending on cash-inflow.
5. Totally avoid debt: Since your income is patchy, you should not be borrowing to sustain these expenses. Taking debt to take care of recurring expenses or one-time spending is akin to digging yourself into a deeper financial hole. Do not take any form of debt, be it a credit card or small personal loans. Any debt repayment will hike up your minimum spending requirement and force you to take more debt just to keep the show running. Every time you will borrow afresh, you will create a new ongoing expense at a time when your income is unstable. For those who have already taken debt, please ensure strict repayment of debt accumulated in the past as part of your minimum monthly expense.
All of us go through patches of irregular income. It may be difficult to accept but it is the truth in a world where job growth is slowing down. In such a situation, managing irregular income is all about not spending the money that you have access to. It only requires a little more discipline and control over your spending.
(By Anil Rego, CEO, Right Horizons)