While it is well known that personal budgeting and having a fiscal plan are essential to tracking personal finances, it is often not well known which type of fiscal year should be used. This would depend on your method of income and the stability of that income. If you are subject to seasonal shifts in income, and do not get a W-2 at the end of a tax year, you should look at which type of fiscal plan would best suit your personal budgeting goals.
Creating a Fiscal Plan
Before you think about which type of schedule you will use for tracking personal finances, you must first have an idea about what personal budgeting and zero based budgeting is. Personal budgeting is simply keeping track of what your income is, and where it is going to. Zero based budgeting is a method of personal budgeting which forces you to stop spending when you run out of money over a set time frame (usually a week or month). To create a fiscal plan you will need to break down your income and expenses into manageable increments such as weeks or months. This will help you realize when fluctuations in either income or expenses occur during the year and allow you to handle them properly.
Difference Between a Fiscal Year and a Calendar Year
The one main difference between a fiscal year and a calendar year is when the year ends. Calendar years start on January 1 and end on December 31 regardless of the finances. A fiscal year can start at any point during a calendar year as long as it ends 12 months later. The US Congress uses October 1 thru September 30 to cover congressional sessions; while most retailers use February 1 thru January 31 so that the holiday rush, returns, and credit card income all are in the same year. School districts end their fiscal year at the end of June to match the end of the school year. The reason for using a fiscal year instead of a calendar year for tracking a fiscal plan is to keep income and the spending of that income in a single cycle.
When to Use a Fiscal Year
A fiscal year is best used for people who expect seasonal fluctuations such as farmers, landscapers or tax accountants. If you own a small business where you or your family are the only staff, and your personal income is directly connected to seasonal shifts, tracking personal finances could be easier using a fiscal year. If you are farm labor, or contract labor, you are also subject to seasonal shifts in income. If so, using a fiscal year for personal budgeting may work. The drawback to using a fiscal year is that you must declare your action for the tax year with the IRS which cannot be changed back without penalty; another drawback is that you must be considered an independent worker, or self-employed to avoid the IRS auditing you if they think there is a reason you should file using a calendar year.
When to Use a Calendar Year
A calendar year is best for people who have a base income each pay period throughout the year. Even if your hours are cut, but you can expect a certain amount of income (such as a set number of hours paid each week), you fall under the calendar year for your fiscal plan. People who are given a W-2 by any company are considered to be employees and therefor are also expected to use a calendar year by the IRS.
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