By budgeting income you begin to create your offense. Offense is maximizing your income and keeping as much as possible to save and invest to create "wealth."
Wealth is the measure of a person's or a family's financial success and well being.
Remember, though, we are interested in budgeting all inflows; not just income. Not all inflows to your budget are income some are transfers from other resources. I will explain as we go forward.
Your inflows fall into several categories:
Salaries or wages
Interest and dividend income
Let's cover easiest ones first.
Earnings from salaries or wages:
This is the amount you receive in each paycheck. If you are paid monthly the input is simple. Use the amount you bring home each month when budgeting income.
But what if you are paid every other week? In all but two months, the number to enter is twice the amount you receive. It seems simple enough but what do you do with the extra two weeks?
If you are budgeting income on a spread sheet using twelve months of input you can increase your monthly income proportionately, or use the method I think is preferable which is simply putting those checks into savings to help you accumulate an emergency fund. Actually, if you are paid weekly, to a greater or lesser degree you will have the same issue when budgeting income because there are actually 4.3 weeks in a month and not four weeks. So, once again use four weeks' pay as your budgeted amount.
Use your net (after deductions) paycheck amount x 4 as your monthly income from wages in your budget. This will help to minimize the effect of being over budget one month and short the next.
Do NOT include overtime pay as an inflow in your income budgeting. Many people have had to extremely cut their lifestyle spending or have not been able to pay their bills because they lost their overtime pay. There is no guarantee or (usually) right to overtime. It's the prerogative of your employer.
Put overtime income into a savings account to help you build your nest egg or to have in case of an emergency.
Earnings from Commissions
Dealing with commissions can be pretty complicated. Commission income falls under the rule "do not depend on income you may not receive". If you are paid commission only, hopefully you have a track record to review to estimate what your average commission has been over the past three to six months, because the best you can do will be to take an average. To be even safer, look over the past six months and average the lowest three months to arrive at a figure.
Using this lower income number and planning your outflows accordingly will lessen the chance of coming up short on your monthly obligations.
In the months your commission income exceeds expectations, do not spend the money! Deposit it into a bank account to help during months when you do not meet your income goal. Remember, when you are using an average, it means some amounts are higher and some are lower. You need to plan for those lower income months.
Include interest or dividend income only if you are actually transferring it monthly into your checking account to pay bills. If you are accumulating interest and dividends into your savings, that's great.
You may be wondering why this is listed as (Savings) and not Savings. If you are transferring money each month from your Savings account into your checking account to pay bills, the budget inflow entry should go here. Remember, we are looking at inflows not income.
If you are transferring money each month, it is important to track how much.
Suppose you have $1,000 in your savings account and are transferring $250 each month to pay bills.
What happens in month five?
Answer: You are $250 short because there is no more money to transfer.
If you regularly put money into a savings account and just as regularly take the money out to pay bills, don't stop saving. Keep it up. Consistently saving builds a great habit. The trick is reducing your spending so you can keep it in that savings account!
Budgeting income practice and exercise: