Not everyone has the luxury of a steady income. If you're on an irregular income, you know the uncertainty and stress it can cause. You also know it creates budgetary challenges.
An irregular income doesn't mean you have to just “wing it” with your finances every month. You can still build an effective budget to help you make the most of every dollar you earn, and you can do it in 3 easy steps.
3 Easy Steps to Budgeting on an Irregular Income
Before we get to step 1, you have a mini pre-step to complete: decide how you're going to track your budget.
There's no right or wrong here. Different tracking systems work for different people.
Some people like to physically write their budgets in their bullet journals where they can, essentially, turn their budget into a work of art. Just please double-check your math if you're going completely analog with your budget!
Alternatively, you could go the opposite direction by using an automated budget tool. You Need a Budget (YNAB) is an inexpensive option at $6.99 per month. If you'd rather try a free tool, consider the free version of EveryDollar.
Many people choose to create their own spreadsheet in Excel or Google Sheets instead of going the automated tool route. You get 100% customization and have a template with formulas to reuse month after month. This customization is important to many but critical to some. For example, as a bi-continental family with an income in Euros, British Pounds, and US Dollars, the automated tools don't work for me, so my personal Excel workbook is everything.
Take a minute to decide which system is best for you. No pressure here, you can always change systems if you find you're not happy with your initial decision.
Step 1: Estimate Your Monthly Income
This is supposed to be the hardest step in budgeting on an irregular income, right? Estimating what income amount you should use?
Well, we're going to make this easy. Instead of trying to project your future income or average your past income, simply use the amount of your lowest-paying month from the past year; that will be your estimated monthly income for the coming month.
This works well for a few reasons:
- This is a conservative number. You're far more likely to exceed that number than fail to meet it.
- It's easier to add more money to your budget when you exceed this estimate than it would be to cut expenses from your budget if you didn't meet this estimate.
- Using this number will force you to prioritize your expenses in the next step. By using this conservative estimate, you're not giving yourself much wiggle room, so you'll have to plan your budget to efficiently cover your most important expenses first.
Step 2: Prioritize Your Expenses
Now we're going to allocate that conservative income estimate to each of your expenses.
Always start with the necessities:
- Food (as in groceries not dining out)
- Shelter (your mortgage or rent plus the utilities and any taxes and insurance)
- Transportation (car payment plus gas and insurance or public transportation costs)
- Hygiene (toiletries, detergent, and basic clothing needs)
Then add in the extremely important expenses:
- Medical insurance
- Debt payments (like student loans or credit card debt)
- Professional memberships, publications, events, and ongoing development (whatever you need to ensure your success in your career – after all, that's what's going to drive your income, right?)
- Savings (even if this isn't your favorite expense item to budget for, it is critical and should absolutely be considered before discretionary spending)
Finally, add your “wants.” You may or may not have enough in your budget at the beginning of the month to cover these, but that's ok because you're probably going to exceed your estimated income. That excess can be applied to these not-quite-critical expenses:
- Paying down additional debt
- Gifts for family and friends
You may have noticed an important category missing…where does charitable giving fit in? Charitable giving could fall into any of these categories. If you strongly believe in tithing, you may consider it a necessity, or it may be extremely important to you. It may just be something you want to include if you have money left over. Add it in as you see fit.
Step 3: Track and Adjust as Needed
Since your income will almost certainly vary from your estimate, you'll want to make adjustments to your budget as you move through the month. As you out-earn your estimate, you get to decide how to spend that extra money!
To make appropriate adjustments, you'll need to track your expenses. How else would you know if your actual spending is in line with your budgeted spending?
Some people make a habit of logging expenses at the end of each day. But if that sounds like too much for you, simply choose one day per week to log all your expenses for the week and make your budgetary adjustments.
Tracking expenses isn't exactly a fun way to spend half an hour, but it's a critical part of budgeting (especially when you're on an irregular income!). Though, figuring out how to allocate the extra money over your estimated income amount is fun.
Now that you understand the process of how to budget on an irregular income, you can simplify your life by applying a few critical budget hacks.
1. Build Murphy's Law into your budget.
You know Murphy's Law: Anything that can go wrong will go wrong. When applied to your budget, it means that there will always be an unexpected expense from something “going wrong.” It could be a traffic ticket, a small appliance breaking down, or a cavity that needs to be filled. Most people will have some expense or other fall into this category nearly every month. So, why not build it into your budget?
Add an expense line item for Murphy's Law and allocate 3-5 percent of your income to that category. At the end of the month, if you haven't used your Murphy's Law money, you can add it to your savings, use it to pay down your debts, or celebrate your Murphy's-Law-free month by treating yourself to a little something special.
By the way, this line item is different from your emergency fund, which should be reserved for true emergencies: transmission failure, medical emergencies, job loss, etc.
2. Automate your savings and investments.
Automating my savings and investments changed my life. With auto transfers from my checking account to my savings and investment accounts, I never have to worry about forgetting to save. Because I have the transfer take place as soon as my paycheck hits my account, I never accidentally spend the money I intended to save. With zero effort, I've been able to build an emergency fund, prepare for retirement, and invest in my “Dream Fund” for bucket list travel, buying more real estate, and launching my own business.
If you're paid on a regular schedule, you can set up your auto transfers to take place on specific dates. If you're only paid periodically (like when you make a sale), ask your HR department about direct depositing a certain percentage of your paycheck to separate accounts.
3. Build a “Feast or Famine” fund.
If you're in a rollercoaster business where you have some great months in terms of income and some painfully slow months, you should strongly consider a “Feast or Famine” fund. During your strong months, you simply move some of your excess income to your “Feast or Famine” high-yield savings account, where it will be waiting for you when you need to cover your expenses during an exceptionally slow month.
If you follow our recommendation to use your lowest-paying month as the basis for your budget, you'll rarely need to use your “Feast or Famine” fund; though, there will likely come a time when you will need it. Then, you'll be glad it's there!