Figuring out how to budget is hard enough on it's own when you have a set paycheck that doesn't generally change. But what about how to budget on an irregular income? That's when things get a bit trickier. And that's when people often stop trying. I've had SO MANY emails from readers suggesting that there's no point in budgeting if you have irregular income.
Nonsense. That's even MORE of a reason to budget. It ensures that you will have enough money to get your bills paid! But it can be a bit trickier. Let me show you the method I've used with lots of success… because being self-employed for years, I have very irregular income. This is old-hat for me 🙂
First, let me quickly dispel the notion that you can't budget with irregular income – imagine any Fortune 500 company. Do they get a steady paycheck from their customers and clients? Heck no. Businesses by nature have very irregular income. And would any large business worth it's weight in salt NOT plan their money using a budget? There are entire departments of employees dedicated to managing the budgets of these companies.
You and your family are essentially a small business. You get income from various sources, and you have necessary expenses that keep your “business” in operation. And if you want your “business” to thrive, survive those ups and downs, and ensure long-term viability, you've got to budget!
The gist is this – you've got to budget your upcoming month using last month's money. Meaning, you need all the money in the bank BEFORE your month begins. However, this might be a tall order, especially if you are living paycheck to paycheck.
I get it.
That's why I created a process to get you there in 6 bite-sized steps.
Even if you feel like you don't have enough money, you can do this.
Prospective budgeting means budgeting BEFORE the month begins. Making a plan for your money before it actually happens is something I've long recommended. And this is where the common questions comes up regarding irregular income – “how can I budget prospectively if I don't know how much money I am gonna get?!”
It's a good question. It's precisely why I'm gonna show you how to budget on an irregular income.
While you might not know exactly how much money you will make, you could probably guess and be in the ballpark plus or minus 10%. So prepare your budget with a lower estimate of what you will make, and plan our your monthly expenses using that estimate as the limit to your spending.
If you take in more income than expected, put that towards steps 2-4 below. If you take in less than expected… well, that's what step #2 is for. As for sticking to your budget, I strongly recommend that you start using a cash budget for most of your purchases.
When you have a set paycheck, you can draw your checking account down to just about zero every month if you want. I wouldn't necessarily recommend it, but you can do it and you'll be okay as long as you have an emergency fund in place. But when your income is irregular, this is dangerous to do.
You've got to have a buffer. This buffer money I'm talking about is separate from funds used for emergencies.
Ideally, you should have a full month's worth of expenses in your checking account at the start of the month. I understand that this might be a tall order, so to start with, get 25% of your monthly expenses in your checking account. So if your monthly expenses are $4,000, you will want $1,000 in your checking account at the beginning of the month. This allows your budget to absorb the irregularities that come with your income.
With this buffer in place, when you have those down months where your expenses exceed your income, your budget can handle it.
As usual, make sure to track your purchases as you go through the month to make sure you are on track. This might be even more important when your income is irregular. My absolute FAVORITE tool for tracking my spending is Tiller. It links to your bank account, and daily places all of your transactions into a Google sheet so you can categorize as needed. It's brilliant.
After you have funded 25% of your monthly expenses, you also need to fund an emergency fund account. The difference between an emergency fund and your buffer might seem subtle, but it's actually very significant.
As explained, your buffer money is there to absorb the bumps of your income.
An emergency fund is for unforeseen emergencies. Do not draw money from this account unless you absolutely need to. If your car breaks down, if your hot water heater breaks, etc. Another example of an emergency when you have irregular income is the chance that you have a really down month income-wise, and your expenses exceed your income plus your buffer. Your emergency fund would come in play here, too.
So how large should your emergency fund be? If you don't have any children and don't own your own home, $500 should suffice. But when you start to add children, and more assets like a home and more vehicles, the likelihood of expensive emergencies grow. If you have children and own a home, you should have about $1,500 in your emergency savings account to start with.
But getting your emergency fund fully funded can be done MUCH faster that you'd think.
This money needs to be in a separate savings account.
After you allocate money to your emergency fund, it's time to return to that buffer and fully fund it to 100% of your month's expenses. After this step is completed, when you sit down at the beginning of the month to plan out the upcoming month, you should have all of the money that you will need in the your checking account already.
This fully funded buffer is the most important tool when learning how to budget on an irregular income. Think about what this will mean when you are budgeting… if you have a ‘down month', you're okay. If your income is sporadic and the timing of your payments isn't what you expect, you're okay.
If you're living paycheck-to-paycheck, this might sound like a daunting task. But keep in mind that steps 2, 3, and 4 can often be completed with one nice tax refund check 🙂
Being a full-time self employed family, I've been there. I've experienced the lowest of low months, and also those months where the stars align and you've got much more than expected. Maybe you worked more overtime, or got some awesome tips as a server.
After those good months when your bank account looks really nice, it can be tempting to reward yourself for a job well done. After all, you endured those difficult months when you could hardly afford to put gas in your car… so a new couch? Why not?
There's another factor here that needs to be considered – when you are in the moment, excited about a great financial month, our brains often make a false assumption. We assume that this must be the “new normal”. You turned a corner and from here on out, you are gonna make this amount of money forever. Maybe you did turn a corner… maybe things will continue to get better.
Even if that is the case, you will still have months in the future that are financially difficult.
So should you go out and buy awesome stuff because you deserve it? It's not a matter of you “deserving” something nice, or treating yourself for working your butt off to make that extra money. Of course you deserve it. But is it smart?
When that difficult month comes around, and you are $1,200 short, what would you rather have? A nice new couch to sit on? Or would you rather have a buffer in your checking account to cover that $1,200 shortfall without even breaking a sweat?
Having an irregular income generally isn't something that most people choose. But… I have a different take on it.
More often than not, those with irregular incomes have something special in them. You don't work 9-5 Monday through Friday, go home, relax, and have enough money to pay the bills. Perhaps you wish that you could. Life would be easier and a lot more predictable… but for right now, that's not your life.
Instead, you might have one job with semi-regular hours, and then you go to work at a restaurant 3-4 nights a week, or run a home-based business. On top of that, your husband might work full time and you feel like you rarely see each other.
I get it. Life is crazy. And it can be hard. But here's what is special about you – you didn't get stuck in your financial situation. You went out and found a way to make it work. Whether or not you consider yourself an entrepreneur, you have that spirit. So I know that you have your hand on the pulse and are always looking for opportunities to make more money.
Don't stop doing that.
How to budget on an irregular income. It's tricky. But it can be done.
I'll go one step further – it NEEDS to be done. I don't just want you to get by and survive month-to-month, I want you to THRIVE.
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