Irregular Income? Pay Yourself Like an Employee of Your Own Business.One way to smooth out an irregular income is to draw down a regular allowance from your irregular earnings, leaving the extra (from the good months) as savings to cover the lean months. If your irregular income comes from being self-employed, then it’s a good idea for taxation and accounting purposes to have a SEPARATE BANK ACCOUNT for your business. When you’re self-employed, it’s easy for the lines between business and personal to blur, BUT it’s so much easier to keep your business and your personal expenses separate if you keep separate bank accounts. Your accountant will love you for it. Not only does a separate bank account make business bookkeeping easier, but you can also pay yourself a regular ‘wage’, therefore eliminating the irregular income problem. Not a formal payroll wage, but regular drawings from your business income that provide you with a steady, regular source of income. These drawings should be calculated from your business profits, not revenue. That means you work out your regular drawings after taking into account your business expenses, your superannuation and tax. What if you aren’t self-employed but your income is still irregular? Maybe you work casual hours and you’re not sure how many hours you’ll work from week to week. The same principle can apply. Have a separate account for your irregular income and withdraw a regular amount. The weeks where you work more should cover the weeks when you work less. How much should you withdraw each week? Your budget is your blueprint to guide you. Here’s how to create a cash flow budget (similar to the ones linked to above) when you have an irregular income.
Start Your Cash Flow Budget by Writing Down Your ExpensesRather than starting your budget with how much you earn start by analysing your expenses so you know how much you NEED to earn over the course of a year. When you have a ball-park figure of your yearly expenses, you can total up all your expected irregular income to see if it will cover your projected expenses. Prioritise your expenses into those that must be paid every month and discretionary expenses that can be cut if your income won’t cover them. Also, write down the TIMING of your expenses. If you pay your car registration once a year, in which month do you pay it? If your electricity is quarterly, what months does it fall due? Rather than guessing expenses and averaging them out over the year, put them into your budget on the month that they fall due. This way you know which months you’re going to need extra cash and how long you’ve got to save up for these expenses. Using an envelope type system can help you save for your expenses. It can be a good idea to put extra funds away in the good months to cover expenses in the off months.
Add Your Predicted Income to Your Cash Flow BudgetThere are several ways that you can budget your predicted income:
- If you have had irregular income in the past, base this year’s income on last year’s adjusting it for any known changes.
- If your work is seasonal, then you will have some idea which months will bring in a higher income than others.
- You could predict your income as per the amount of work that you reasonably expect to generate and the terms of trade that you intend to offer (ie, 30-day accounts etc). Be conservative in this estimation, it’s better to underestimate than to overestimate your income. If you’re new to irregular income, then maybe ask others in the same line of work what they earned in their first year and again give a conservative estimate.
- Your cash flow budget will work better for you if you can predict how much income you expect in which month. That will give you an indication in advance which months will be lean.
- If you get a base salary plus a commission, you could budget according to the base salary and consider any commission a bonus.
- As the year progresses you may get a better indication of your income patterns. Adjust your budget accordingly.