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How to “Budget” Your Income

A few weeks ago we covered the importance of setting up a budget, and how to calculate it—estimating your monthly expenses and subtracting that from your income (and making sure you don’t go in the negative!).

But for some of us, trying to figure out just what your monthly income actually is can be a little challenging. Using myself as an example, as a freelance writer and consultant, my income can vary from month to month, depending on what jobs come in and when I receive the payment for each job. So I don’t really have a set amount that I know will land in my checking account each month.

Maybe you are paid hourly, and your hours can vary from week to week. Business can pick up, and you are needed for more hours, or slow down and your hours get cut. If you are not paid sick leave, any time you’re ill and miss work, that reduces the hours you are going to get paid for.

If you are paid each week, trying to estimate your monthly take-home pay can be confusing: Some months have four pay periods and paychecks, and others have five pay periods and paychecks. It seems like a nice surprise when you get that “extra” paycheck in a month, but it can make the other months seem a little lean.

To calculate your income for your budget, you are just going to have to do a little guesswork and estimating.

First list all the income you can reasonably expect for the year, going month-by-month. Maybe you have a regular part-time job that you are expecting to keep. If your hours vary each week, take the average weekly hours for a six-month period (your hours over the last six months, divided by the number of weeks—26). Then multiply that times your hourly take-home pay rate, and by 26 to get your six-month income total.

Add to that any additional income you might be expecting: Extra work, a holiday period when you might be getting extra hours, child support or alimony, gifts, etc.

Now you should have a total average income for a six-month time period. Divide that by six to get your monthly expected average income. Use this figure on which to base your monthly budget.

Don’t forget to change your budget if your circumstances change! You get a raise, or get laid-off for a while; or move and your rent goes up or down, etc.

It may seem like a lot of effort to go to, but having a budget, and knowing how you are either meeting it or missing it puts you in control of your finances and your life.

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