Now that we have set up some goals for our money (short-term, mid-term, and long-term) and gotten an idea for how we would use our money in an ideal financial world, it’s time to move into the specifics of handling our real-life cash flow situation.
As you’ve probably figured out from this post’s title, we’re going to start out by estimating the money flowing in, our income.
You might be thinking that the income part of the equation is easy, unless you are paid irregularly such as gig workers, entrepreneurs, and those paid by commission.
Those of us who recieve a salary or hourly wage can look at our regular pay checks and feel relatively certain of what our income will be. Those whose pay checks aren’t necessarily the same amount, or at regular intervals, have to estimate a regular amount based on the last 6-12 months of income.
Still, when I manage my own money I like to have a few ways to UNDERESTIMATE my income built into the whole process. By underestimating our income, we give ourselves a little room for error in our financial lives. (And, yes, this will get coupled with a slight overestimation of our expenses, as well.)
I use 3 methods to underestimate my income.
Why so many?
Well, when I was heavily in debt, multiple levels of underestimating my income gave me more room for error. And, if I had a small deficit when I finished comparing my underestimated income with my overestimated expenses, I knew I was probably fine. So, for me, it lowered my stress level when it came to my money.
As you evaluate your own financial plan, you can use some or all as you wish. I would suggest using at least one of the following.
Income Rule #1: No Bonuses; No Overtime
Only use your base salary/hourly rate when estimating your income. If you receive bonuses or get any overtime, leave that out of your estimates.
When that extra money does come in, we can treat it as a windfall.
These income amounts, for those who get them, may seem all but certain at times. But, they can change, or disappear on you altogether, if your employer decides to make cuts.
For those with irregular income, you may want to eliminate the highest month of income from your calculation to mimic this rule.
Income Rule #2: Round it Down…a Little
Another trick I use when working through my financial plan is to round down my pay checks to the nearest $10 or $25 interval.
For instance, if my take-home pay was $1788.23, I would simply budget for $1780.00 or $1775.00.
It wasn’t much on its own, but rounding down your income in this way adds up over several pay periods.
And, that gives you some extra cushion in your plan when it comes time to put it into motion.
Income Rule #3: Four Weeks per Month
This rule applies mainly for people who get paid either every week or every other week (bi-weekly). If you are paid semi-monthly (twice monthly, which is the most common pay period in the US) or monthly, you can mimic this by dropping a few extra dollars using Rule #2.)
You may have noticed this last rule is also the most extreme in terms of underestimating our income in our cash flow management system. For my situation, bi-weekly pay checks, I am ignoring 2 entire pay periods each year; for weekly pay periods, of course, we would be ignoring 4 pay checks each year. All said, this one is just under an 8% reduction.
But, if you can get you expenses below this level you’re going to be in really good financial shape. (Good enough financial shape to start increasing and/or diversifying your saving and investment goals)
You may decide to use any combination of my rules above, or maybe you’ve come up with some methods of your own.
However you decide to manage your income, I would suggest you have some way to underestimate that income when your mapping things out. It’s better to have some extra room in case things go wrong (sometimes, they will) instead of needing everything to go perfectly, which rarely happens.
Now that we’ve looked at the money flowing in, we can look at how our hard-earned cash flows out. See you next time.
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