Personal Budgeting and Forecasting Non Traditional Income

Non traditional income for this article references to money made not from a paycheck or even on a regular bases. Take my situation for example. I have been self-employed for over 12 years. My income is generated through contract work. Sometimes I have more contracts then I know what to do with, and other times I’m starving for the next one to come along. So, how do you budget or forecast for this type of income. Lucky for me, in my previous life (when I was a young adult) I was a waitress. And just like now, income fluctuated all over the place — so I’m use to it. Having my income fluctuating and being irregular cause my to jump head first into the world of finance, and help me become a savvy saver.

Budgeting and Forecasting For a Non Traditional Income:

I use projections. The key with projecting non traditional income is to take the lowest amount for your income and the highest for your expenses. With a non-traditional income taking the suggested “12 months projection” does nothing. For example – If I made $5,000 in June 2009, and $10,000 in June of 2008 that’s a big difference. The difference is so big that it would throw off my projections. My solution is to take the smallest amount from 2008 and project off that number. Using this method helps me sleep at night. In the same token, using the highest amount for expenses help prevent a lack in resources because you are budgeting for the largest amount. See example below (amounts are monthly amounts).

Expenses

• Car $500 (fix rate)
• Electric $85 (my highest bill)
• Gas $120 (my highest bill)

Total $705

Income

• Contract Work $3,000
• Online Revenue $200

Total $3,200

The key to budgeting non-traditional income is to monitor your funds. In the example above I’m spending $705 per/month and making $3,200 per/month leaving $2,495 per/month. If this was my real life budget here’s what I would do.

First I would take 80% of the remain total and put that in my money market account. From the example that would be $1,996. The next step would be placing the remain funds in my checking account. That would be $499. At the end of the year, I would review my budget and forecast my new totals. If I see that my expenses are much lower (maybe I not washing dishes or watching TV as much) I would make those adjustments in the budget. Once I have a new total for my expenses, I would place 2 months worth of expenses in my checking account and move any funds over that amount into my money market account.

As you know I was already putting 80% into my money market account. Re-total your emergency fund, which is 8 months worth of expenses. Let’s do another example.

In 2009, I spend a total of $8,260 however I budgeted for $8460. This leaves me $200. I made $38,000. At the end of the year, I would put $1376 in my checking account, which is two months worth of expenses. You should have already moved $23,792 into your money market account throughout the year — remember the 80%. Now do your emergency fund which is 8 months worth of expenses (from the example that would be) $5,504. This means you have $18,488 to put into a CD with a higher interest rate. (This example does not include interest income from the money market account).

So now you see, you can still create a budget even if your money is funny. If you noticed, in my forecasting I never address the $499 I was keeping in my checking account each month. Sometimes, we buy things we don’t need. Use that money. However, if you are a strict saver, put that money in the money market too.

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