How can I budget when my income is different each month?
When you have a predictable, fixed income each paycheck budgeting can be easy. But this isn't the case for everyone. You may be a freelancer, an hourly employee with fluctuating hours, or earn on commission. Whatever the reason, if your income is different each month, NeoBudget's income allocation feature can help you simulate a fixed income. My wife and I used this method when I was freelancing and loved that we knew what to expect in income each month.
- Create an envelope called "Income." Whenever you record an income transaction, allocate the full amount into this envelope. In this way this envelope will grow throughout the month.
- On the Budget tab in NeoBudget, create a fake income source called "Self Payment”" Set the amount to be 0.00 and set the frequency to be monthly.
- Determine your base line earnings each month. This is the amount you know you will make each month (let's use $1000 as an example). While still on the “Budget” tab, click on the “Income” envelope you created and under “self payment” enter in “-1000” It is important that this be negative because we are moving money out of here to fund all your other envelopes.
- Now go through and disperse the $1000 among your expenses (all the other envelopes). To do so, click on each envelope and under “self payment”, enter in the amount (as a positive number) you want to fund to that expense.
- On the first day of every month Click on "New Entry" then "Income". Choose the "Self Payment” Income source and you'll see it populate the values to move money around. Leave the total amount of the transaction at 0.00 and save the transaction.
What about if I make more than my base line income I've set up in a month? We recommend using this as padding to get a paycheck ahead. If, over the course of 6 months, you are continuing to make more than your base line you can consider increasing your monthly “paycheck.” The flip side is also true: If you continue to make less than your scheduled “paycheck”, then you need to decrease your baseline amount.
There are several benefits to using this method:
- Eliminates the "feast or famine" mentality. When income is very high one month it can be tempting to splurge, and when income is low the next month it's easy to get distraught and worry. Simulating a fixed income like this will even out your income stream, giving you a confidence that you know where your next paycheck is coming from.
- Easier to take time off work. Since you know your monthly income is 1000.00 (or whatever you decide), you know how much money should be in your Income envelope before the first of next month. If you have saved a surplus you can take a day or two off for vacation without worry that you won't be able to meet your budget next month.
- Give yourself a bonus without pain next month. If you've had several banner months in a row, your Income envelope will start to grow faster than you're paying yourself. You could leave it there for some extra padding, start an emergency fund, donate it, or give yourself a bonus to pad your expense envelopes as needed. To do this you would click on “New Entry” and then create a one-time “move” transaction from your income envelope to your expense envelopes. We usually like to leave enough padding to fund 2 future paychecks and then disperse the rest where it is needed.