A little more planning and discipline is required when you budget for irregular income. However, once you work out the initial kinks it gets easier.
If you are not getting a consistent paycheck you are most likely earning an irregular income. Freelancers, contractors, or other self-employed people earn irregular incomes. If you are commission only or your hours vary greatly from week to week this is also considered irregular income.
My husband has his own business and his pay is very sporadic. We have really good months and really bad months.
It is important for us not to spend too much in the good months. This serves us well since there are months with no income from his business. Because we save in the good months we are able to manage our expenses without cutting back.
Although it is tricky, it can be done. Below are some tips to budget for irregular income.
1. Determining your average monthly income is required if income is irregular.
It is easier to budget for irregular income when you have an estimated average monthly income.
Take your earnings for one year and divide it by twelve. If you have not worked in your field for a year yet it is more difficult to get a good average but do the best you can and then keep watching it until you find one.
If your line of work is seasonal make note of that. Maybe you earn more Oct-Dec in which case you’ll want to take that into consideration when you are creating your budget.
Just do your best to see approximately how much you earn per month.
2. A detailed list of expenses.
All budgeting methods require a list of expenses. When budgeting for irregular income the more detail you have the better prepared you will be for those months of low income.
Group your monthly expenses into two categories (needs and wants). Next, rank the expenses in your “need” category in order of importance. Most items are going to rank equal here, but rank them anyway. This makes it super clear what expenses need to be paid no matter what. Add up those expenses and that is the amount of money you need each month to live.
Once your “needs” are determined, rank your “wants” in order of importance and add those together. These are not necessary expenditures but putting them down gives you a good idea of where you need to be in order to pay for both your “needs” and “wants”.
Don’t forget about irregular expenses. These are the bills that are not the same amount each month or are not due every month. These can be both “needs” and “wants”
If the amount per month varies, find the average (same method as the income). If the expense is not monthly, again find the average. Take the total expense per year and divide by twelve.
For example. Car insurance is $1200 per year. Divide that by 12 and you get $100 per month.
3. Compare your income and expenses
Do you have enough income to cover your “needs”? If not, then it is time to look for additional income sources or re-evaluate your current standard of living, but that is a whole different topic.
If you have more than enough average monthly income to cover your “needs” then you are in decent shape. Do you have enough to cover most of your “needs” and “wants”? If yes, fantastic! You are most likely living at or below your means and you have a good handle on your irregular income.
It is likely that you are somewhere in the middle where most of the time you can cover your “needs” and some “wants” but there are some times when you are not so sure. Your preparation for the times when your income is either low, or in some case…nonexistent is crucial for staying ahead.
4. Savings plan for irregular income
You guessed it! Savings is very important if you have irregular income. I am not referring to emergency savings. Nope! Sorry, there is no taking from that account unless it is a true emergency.
If you have not done so already add an expense to your “want” list called savings and put it to the top of that list. You want to save 3-6 months of your “need” expenses. Yes….3-6 months beyond your emergency account. I know it sounds like a lot but trust me, you will be happy when those bad income months occur and it does not phase you in the least.
Once you have that 3 – 6 months, you are good to go. In bad months you can “borrow” from that account. Hold up! Did I just say borrow? Yes, I did. Whatever funds you use from that account get paid back when you have those great months so be sure to add that payback expense on the top of your “want” list until you have fully re-funded your account. This sort of makes you your own lender. If you want to, charge yourself interest.
Budgeting for an irregular income can be difficult. But it’s really not so bad as long as you have enough socked away to cover your bad months and you promise to pay back what you borrowed.
Do you have an irregular income? Are you currently budgeting? I’d love to read about what method you use or if you are not budgeting, what are your struggles. Please leave a comment below.
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Thanks for reading!
Stay Balanced,
Jill