What is estimating income about?
Estimating income is self-explanatory but seldom as easy to implement as it sounds. It is the process of combining everything you know or sense is likely to affect your income for a specific future period, then using it to forecast income. Some sources of income are naturally much more difficult to forecast than others. With multiple income sources, it is necessary to first estimate each one, then add the individual estimates to derive total estimated income for the period being considered.
Estimating income is essential to various aspects of financial planning
Understanding how to estimate income is important whether you are creating a budget, planning to achieve financial goals, or attempting to avoid financial problems. Total estimated income (by week or month) forms the basis of your spending plan and aids in projecting cash flow for future periods.
Combine prior period income with anticipated changes to estimate your future income
Begin estimating income by separately considering income from each source for a prior period equivalent to the one to be estimated. Common income sources are listed below, but you may have income from other sources not shown that are less common. For each source, estimate the amount of income you expect for the period being forecast. Finally, add the individual estimates to derive total estimated income for the period.
Try to anticipate income from all possible sources and potential changes in income
Here are some of the factors that can increase levels of income from various sources (and sometimes decrease it):
› Business upturn/downturn
› Child support
› Commissions and royalties
› Cost-of-living adjustments
› Divorce settlements
› Health condition
› Interest rate changes
› Investment gains/losses
› Job promotion
› Personal property sale
› Salary merit increase/decrease
› Social Security changes
› Tax bracket drift
› Tax refund
› Tax withholding changes
› Unpaid leave of absence
When estimating income that is highly variable, good judgment requires estimating conservatively. Being surprised by an income surplus is far more pleasant than having an unexpected income shortfall. In fact, the latter can cost even more if you need to rely on credit to cover the shortage. Use the reasonableness test to avoid unrealistic estimates.
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