Budgeting plays a very important role in managing your finances and ensuring that you do not face financial hardships. If you are self employed or if a large proportion of your earnings comes from commissions, then budgeting becomes critical because your income will be irregular.
Understand your income
The first step in planning a budget is to understand your income. There might be some irregularities in the cash flow but there would always be some amount that is certain. So try to predict what is the minimum amount that you are going to make every month and how much variation is there likely to be in the rest of your income. It would also be a good idea to predict your income for the next month at the end of every month. This way you would know in advance if you would be facing any financial difficulties in the near future.
Account for fixed expenses
Once you have a greater clarity on your income flows, you should focus your attention on the expenses. All expenses can be categorized into two broad headings – fixed and variable. Fixed expenses are those that do not change no matter what your income is. These include rent for your office and home, mortgage payments, insurance premiums etc. As you would have no flexibility in reducing or avoiding these expenses, you should first account for these from your income. If at any time you feel that your income would not be sufficient to make these expenses, then quickly seek an alternative income source.
Minimize variable expenses
Variable expenses are those that are largely under your control. For example, you grocery bills or the fuel expenses of your car would have to be paid every month but you would usually have some ability to lower these expenses. If you feel that your income for the next month is going to be low, then try to minimize these expenses. You should also cut down on discretionary expenses like buying new clothes or going on a vacation in such a situation.
Maintain an emergency fund
Maintain a separate fund, which you can use when you are in financial trouble. Every time your income is in excess of your expenses, you can deposit some amount in the fund. And every time you face a shortfall, you can withdraw some money from the fund. But you need to be disciplined in using this fund. Use it only during financial emergencies and not on discretionary purchases.