Budgeting on a variable income

2013-11-20 10:00

Beatrice, a 25-year-old entrepreneur, recently opened her own hair salon.

“I understand the need for a budget to manage my money better, but how do I go about this when my income is uncertain every month?” she asks.

Budgeting for a variable income is a problem many people face. Beatrice’s starting point should be the absolute necessities that have to be paid monthly, says Lizl Budhram, Old Mutual’s advice and regional support manager. This will help her identify the minimum income she requires to cover non-negotiable expenses, such as water and electricity, rent and groceries, and levies.

However, Beatrice has to be realistic about the fact that some months will bring in less income than others and she needs to learn how to budget around a fluctuating income. Here are several ways to manage a budget when you earn a variable income:

An emergency fund

1. This should be your top priority when you start earning, regardless of whether you earn a variable income or a fixed income.

However, it takes on a new importance when you find yourself juggling expenses against income that is constantly changing. Ideally, you should have an emergency fund that is equivalent to six months’ salary.

Don’t panic. You can build up your emergency fund over a period of time.

If you can set aside savings that amount to six months’ salary over an initial two-year period, you can start channelling that money towards other savings goals.

Pay yourself a set salary

2. You can set up a separate bank account to receive payments from your clients each month. At the same time, set up a debit order for a fixed “salary” to be paid into your regular bank account every month.

You can then draw up a budget based on the fixed salary that you draw.

This plan has two benefits.

The first is the benefit of setting up an automatic savings fund because any additional income is automatically saved in the first bank account.

The second is that if you earn a higher income in January and March, but February and April are leaner months, you will be offsetting the higher income against the lower income and ensuring that you come out with a manageable budget every month.

This ensures that you can pay all your expenses even in the “lean” months.

Budget conservatively

3. To plan conservatively, use one of your lower-income months as a guide. That way, you’re building in a cushion. Then list all your fixed and variable expenses in order of priority.

When you draw up a budget, don’t forget your yearly expenses, such as school fees, car services, homeowner’s insurance and a holiday budget.

Always make sure to pay at least the minimum on your credit cards and if you are able to, increase the repayment amount in the months when you receive a higher-than-usual income. The goal here is to spend less than you make each and every month.

Budget for your tax return

4. Set aside a percentage of your income every month into an interest-bearing bank account or a money market account. This will come into use when you submit your tax return, if you find that you have to pay the SA Revenue Service (Sars).

If the amount you have to pay Sars is less than the amount you have set aside, then you can save the balance. A tax practitioner or financial adviser should be able to advise you on how much you should set aside for this, based on your income.

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