Why You Should Budget With Last Month’s Income

About a year ago I decided to start budgeting with our previous month’s income.  This one change has made a huge difference in how I manage our money, and budgeting on a variable income so much easier!

We already had enough in our savings to do this, so we didn’t have to build up one month’s income over several months.  (However, now we have one month’s income less in our savings – so I do need to make it a priority to build our savings back up.)

If you don’t have enough yet to budget with a previous month’s income, you’ll need to put a little extra in savings every month until you’ve built up a month’s worth of income.

 

Saving Up One Month’s Income

You can designate a flat amount, or a certain percentage, out of your income to build up your one month’s income.  Then you need to budget with what’s left until you’ve got the one month saved up.

It would look something like this:

  • You make $5,000 a month (net) and want to save 10% toward building up one month’s income.
  • Every month, you set aside $500 (10%) in a separate account.
  • You budget with what’s left ($4,500).
  • After 10 months, you’ll have one month’s income!

I know this might seem like a long time to save money just so you can budget differently, but it’s worth it!  Besides, saving money and living on less than you make are excellent disciplines to master.

 

How to Budget With Last Month’s Income

Typically, budgets are created to manage money that’s expected to be earned.  As each paycheck gets deposited, you use a budget to determine how you will allocate those funds.

If you live on a variable income, this can make things a little tricky and unpredictable.  For example, we rely on my husband’s overtime hours to cover our expenses.  However, those hours differ every week.  So, I don’t know exactly how much we have to budget with until each payday.  This can be stressful!

When you budget using the previous month’s income, you’re only managing money you already have.  This means that all of the money you budget with this month is money you earned last month.  And all of the money you make this month will be saved and budgeted for next month.

As you can guess, this method eliminates several problems that arise with a variable income.  But there are other great benefits to budgeting this way, too!

 

Benefits of Budgeting With Last Month’s Income

You’ll have less financial stress.  A lot of worrying and anxiety with finances is tied to uncertainty.  Will you have enough to cover all of your expenses? When you budget with money you already have, there is no uncertainty.  You always know exactly how much you have to work with.

You can pay all of your bills at the beginning of the month. On the 1st of each month, I transfer the income we earned the previous month into our checking account.  Then, I pay all of our bills for the entire month, along with our tithe.  I don’t have to “time” any bills, and I know exactly how much we have left for everything else.

You’ll learn to spend less than you earn.  As you build up one month’s income, you learn how to live on less.  In order to save up this amount, you have to cut out some unnecessary expenses and plug the budget leaks.

Budgeting on a variable income is so much easier.  This was the main reason I started using this method.  I was always struggling with budgeting the variable weekly paycheck and not running out of money before the next paycheck.  Now, I know exactly how much we have for a whole month, and I keep track of how much we’ll have the next month as each paycheck comes in.

You may find it’s easier to be consistent with charitable giving. Before we switched to this method, I rarely gave 10% to our church.  Instead, I would just give what I thought we could afford each week.  Now, I give our full monthly tithe by the 2nd of each month – before it gets spent on other, less important things. This is a high value for us, so this benefit alone makes it worth it.

You have a financial buffer. When you’re always a month ahead, you’re better prepared for unexpected expenses. You have more wiggle room with costs you didn’t plan for, which allows you to rearrange your budget when necessary.

You break the paycheck-to-paycheck cycle.  This is a biggie.  You’re no longer stretching your dollars to the next paycheck.  You don’t think in terms of budgeting from one payday to another. Instead, you’re always a month ahead, your bills are always covered, and you know exactly how much you have for each 30-day period.

 

In A Nutshell

Budgeting with the previous month’s income is a method that allows you to always be a month ahead in your finances.  Basically, it’s the same thing as having a one-month emergency fund for your regular budget.

Starting each month with all the money you’ll need to cover your expenses is incredibly freeing.  There is no more waiting to pay bills until you get paid, or waiting to see how much you’ll have left to put into savings.

You can designate where all your money will go at the beginning of the month, and know how much is left for daily living.

I would especially recommend it for those who live on a variable income.  You’ll feel much more in control of your finances.

 

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Woman counting money with text overlay: 7 life-changing reasons you should be budgeting with last month's income

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