Financial Planning On An Irregular Income
Charting a successful financial course on a variable income hinges on being able to understand the past as it relates to your finances in order to realistically plan for the present and future.
The first phase should focus on evaluating your income for the past 3-4 years. Even if you have just began your career in commission sales or as an entrepreneur, it will still be beneficial to review your past income. Individuals who have built a track record in commission sales or through self-employment will be acutely familiar with the "peaks" and "valleys" of their business. What are the most lucrative months of the year? What are the slowest and most financially challenging? How much did you earn in the way of special bonuses in the past 3 years? Examine your fixed and "unexpected" expenses over the past 3-4 years. How many of your expenses pertain to discretionary spending? Has your debt load stayed roughly the same or has it substantially increased? How much consumer debt have you incurred? Are there any new expenses, if so, what are they?
Secondly, examine your savings. How much have you been able to save over the past 3-4 years, calculated as a percentage of your monthly income, 2%, 5%, 12% or more? Do you have a savings goal? Have you been able to achieve your savings goals over the past several years? Are you contributing to a tax-deferred retirement plan? How much do you contribute towards retirement? Are you happy with your overall rate of savings?
Lastly, establish a targeted income stream that you absolutely need to generate in order to meet your living expenses and savings goals. Working with actual numbers will enable you to create a practical budget and pursue "achievable" financial goals.
Budgeting And Planning Strategies
1. Avoid spending the money as you receive it. While receiving a hefty commission check of $4000 is an exhilarating feeling, it is equally difficult to resist the urge to spend it on something frivolous. Large bonus checks can act as a partial buffer to cover your expenses during long stretches of low income activity. A portion of a sizable commission check should ideally be put towards savings. Anticipate the financially lucrative seasonal periods that are integral to your business and plan for the lean times.
2. Realize that your budget and financial planning goals will adjust to changing circumstances and priorities. Strive to be flexible in your planning and general outlook.
3. Create a streamlined budget with expenses ranked in terms of priority. How much do you need for auto expenses, groceries, health care coverage, public transportation and utilities as well as unexpected expenses? Establish separate checking accounts for household and personal expenses.
4. Accumulating a large cash reserve should be a top priority. It may be helpful to open multiple savings accounts. Saving accounts for various financial time horizons can consist of the following categories: short-term (3-6 months), intermediate (8-12 months) and long-term. Shop around for the highest yield without relinquishing safety. Leftover money should be put towards certificates of deposit or towards your savings accounts. Your emergency funds should be used for an "actual" emergency and not to cover your expenses during a long break of low income activity. Bank all "windfalls" such as bonus checks.
5. Do not neglect saving for retirement. Create a "manageable" automatic investment plan. Set aside a fixed amount of money in a separate checking account (e.g., $600 or $1000). Determine the amount that is to be deducted monthly (e.g., $25 or $50). This strategy can space out your investments over time. Do not forget to replenish the checking account and maintain a balance above the minimum requirement.
6. Do not skimp on healthcare coverage. It is far too easy to overlook health care coverage simply because "we are healthy" at the present time. However, this type of reasoning is far more expensive in the long-run. Do a scrupulous comparison of health insurance plans in order to obtain appropriate and affordable coverage.
7. Create a chart that projects your income and expenses over a 6 month time horizon.
8. Do not underestimate your expenses. Many expenses such as utilities increase over time.
9. Do not overestimate your earning potential (e.g., commissions or bonuses).
10. Obtain a part-time job to offset slow periods. Not only can you generate more income but you may be able to establish new contacts and expand your business.
11. Pay bills on time and try to plan for the next billing cycle. Staying "ahead of the game" by one or two billing cycles will not only reduce stress and anxiety but will enable you to maintain greater control over your budget and plan for your long-term financial goals.
For informational purposes and not intended as advice.
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