It is always a bit more difficult to budget for anything when you have an irregular income, but even more so when buying a home. What defines an irregular income? Normally, it’s someone who works on commission or who is self-employed. And this is a problem that you see in your own budget, as well as banks and mortgage companies see when looking to lend to you.
According to Dave Ramsey, leading “Smart Money” guru, you have to be even more diligent with your budget and making sure you keep plenty of liquid money set aside to cover months when your income fluctuates lower than normal.
Keep a budget on paper and / or on your computer and update it often so you always know exactly where you stand financially, and what’s still coming up the rest of the month, quarter and beyond.
Dave offers a “Monthly Cash Flow Plan budget form” and this form helps you to figure out just how much money you need each month in order to cover your essentials; food, clothing, shelter/utilities and transportation. Once you’ve got that down, you can move on to the Irregular Income Planning form.
You can then move on to Dave’s “Irregular Income Planning Budget Form” that you can get from his website, so start by looking at the essentials on your original budget list. Prioritize each item on the Irregular Budget Form”, putting the most important items at the top, the least important items at the bottom. Always pay from the top, down.
When you look at the forms, you’ll notice they have two columns; an “amount” column, and a “cumulative amount” column. The cost of the item goes into the “amount” column, and they running total goes into the “cumulative amount” column. Be sure you keep both these columns up to date at all times.
As an example, if you list food first with a total of $350 per month, that number would go in both the “amount” and “cumulative amount” columns. If you list gasoline second, then that cost of $175 would be listed in the “amount” column, then the total of those two items, $525, would be listed in the “cumulative amount” column.
You can then continue to create your Irregular Income Planning form like this until each and every spending category is listed. Then, each time you receive a paycheck, take that amount and spread it out to your budget items, starting at the top and working your way down.
If your check doesn’t cover everything listed, don’t panic! Use it to pay as much as you can and when your next check comes in, just pick up where the last check left off.
It may take you a few months to get the hang of it, which Dave says is normal (it took me a few months too). The key is to put your plan into place to control your spending, and build wealth for the future – your future home!
Don’t let the fear of budgeting an irregular income scare you off. Regardless of how you’re paid, budgeting is one of the most important things you can do with your money. When the banks and mortgage companies see that you not only budget, but budget successfully, they will see that you DO deserve to get a loan – at a great rate!
When you’re ready to start looking for your new home, call us and we’ll help you make sure you’ve got everything you need in order and help you find the perfect home for you and your family!