Now that you have an idea of the various budgets that can you can apply to your own finances, whether you earn a regular salary or have irregular income (see “Types of Budgets”), there are some pre-budget calculations you will need to make. Before getting your plan down on paper, in a spreadsheet, or in an accounting program, there are a few steps to tracking your income and expenses that will help you define a workable budget.

Income

Your income is not just your salary, or any residual income from a microbusiness, or just your monthly accounts receivable. It is any and all money you may generate throughout the month, or the budgeting period you would like to schedule. It may be easiest to calculate your average income on a monthly basis.

With that in mind, it is best to track you income for at least 3 to 6 months to get an idea of your average income. Use pay stubs, monthly statements, payment receipts to your business, any other documentation, or even your memory in your calculations. Your total income in one month can include your salary, any dividends from investments, earned interests, accounts receivable or free floating cash you gained during the month.

If you earn a salary, your average income is much easier to calculate than if you are a freelancer, independent contractor, or business owner. Either way, the process of arriving at average income is similar. Total all income from the last 3 to 6 months, and divide by the total months used in your calculations. If you decide to use a budgeting period shorter or longer than monthly, you can divide or multiply the average monthly income to coincide with your schedule.

Your average income will act as the basis for payment of all your expenses. Expenses are often difficult to calculate, which leads many would-be budgeters to abandon their schedule altogether and thinking they have failed in their attempt for financial control. It is important to push through the difficulty, because if you ensure your expenses are accurate and realistic, you will have better chances of adhering to a budget. Even making it through one budgeting period and adjusting it to better fit your financial habits is a step in the right direction.

Please see “Pre-Budget Setup: Expenses" for detailed instructions on calculating expenses. For potential budgeting shortcomings that can be avoided by sound expense calculations, review the budgeting-help.com article on “Budgeting Pitfalls”.

References

Howtodothings.com. How to Save Money
Chicagofed.org. How to Budget and Save
Erin Huffstetler. Debt Free Living
John Casteele. How to Budget on a Irregular Income