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How to Budget on an Irregular Income

by Jackie Beck

How to budget on an irregular income
If you have an irregular income (due to owning your own business, being on commission, working a job with varied hours, etc.) it can be hard to know how to set up a budget.

You never know what you’ll bring home each month, so the typical budgeting advice may not seem like it applies to you. After all, how can you budget when you don’t know what you’re going to make?

Turns out, it is possible.

Budgeting on an irregular income – the basics

Regardless of the type of income you make, the basic budgeting principles are still the same. That’s because your basic expenses are pretty much the same, regardless of how you make your money.

This means that even when you’ve got an irregular income, you need to:

  1. Add up all of your fixed monthly expenses (such as house payment, car payment, phone bill, health insurance, etc.)

  2. Add up all of your variable monthly expenses (such as groceries, gas, electricity)

  3. Add up all of your irregular annual expenses (such as car insurance, Christmas & birthday gifts, taxes, memberships)

  4. Allow for long-term savings for retirement & other goals. (Yes, these are expenses too.)

From there, total up your expenses, and divide by 12. This gives you the least amount of money that you’ll need each month to break even — which is what you need to know. Then prioritize those expenses so that the most important ones are listed first, and the least important ones are listed last.

How irregular is your income?

If you don’t have any sort of guaranteed income at all (which is the situation I was in for four years) you’ll basically need to go into super-savings mode at first: saving as much as possible above the basics for the future until you’ve built up about six months worth of expenses in a short-term savings account. That’s the account that will get you through the lean times. Just remember that account doesn’t include your long term savings, or your emergency fund.

If only a portion of your income is variable (say, because one person has a salaried job, and the other receives straight commission), things can be much easier. In that situation, I’d suggest living off the salaried income, and using the rest for savings, long-term goals, and the occasional splurge.

Base things on the bare minimum

To really understand how to make a budget on an irregular income, you’ve got to think of things in stages:

  1. Doh.
    (“I don’t even have enough to pay all of my normal bills yet.”)

  2. Bare minimum level.
    (“OK, I’ve made enough now to pay this month’s bare-minimum bills.”)

  3. Doing ok.
    (“I’ve made a little extra, so I can do some of the extras and increase savings.”)

  4. Doing awesome.
    (“Wow this is a GREAT month! I’ve got money coming out my ears.”)

Your budget then follows those same stages. When you’re in “Doh” mode, you start by paying your most important expenses first. (Housing, food, electricity, basic transportation.) And that’s it. If you don’t hit bare minimum level, you use your savings to pay for the remaining expenses. Once you’ve hit bare minimum level, you can breathe a sigh of relief knowing that at the very least, you’ve covered those. Once you’re doing ok for the month, you can start to pay for some of the not-so-critical expenses in your list.

And those months you’re doing awesome? Those are where you need to be like the the ant, and not the grasshopper. Remind yourself that the times when you do have money are exactly the times that you need to save most. Sure, you can treat yourself a little, but you’ll want to fund your savings like crazy too — especially if those awesome months are few and far between.

The hardest part

Probably the hardest part about having an irregular income (besides the lean months and the stress of uncertainty) is getting used to knowing that you CAN spend money even though it’s not coming in. (So long as you’re not going over the monthly amount that you figured up, and as long as the flush times continue to be often enough to keep things relatively stable over the long term.)

Of course, it can also be hard to know that even though you have thousands of dollars sitting in the bank and the immediate prospect of more coming in, that you shouldn’t go splurge on a last minute trip to the Caribbean. Instead, you have to plan for that too.

And that’s really what budgeting is all about: making sure you’ve got the money on hand to do the things you need and want to do.

Posted in Budgeting on 02.04.13 with 14 comments.

14 Responses to “How to Budget on an Irregular Income”

  • Jason says:

    Great stuff! I’ve lived off of irregular income for about 2 years now and it’s been hard to get used to. Thankfully, we’re pretty good at budgeting so it hasn’t been too much of an issue. As you said, we determined how much NEEDS to come in each month. After figuring that out, that’s how much I pay myself and I let any “extra” money pile up in my business account and act as a large emergency fund for the months when the revenue isn’t so great.

  • Hey. great topic! and really timely. We get asked on a near daily basis how someone with irregular income could use our app (planwise.com) and we’ve not yet built in specific features because dont quite understand the specifics of the challenges… which you’ve really helped to illustrate here. So thanks!

  • Jenni says:

    Despite teaching financial literacy, I am challenged – and sometimes stressed out by my irregular income. It seems like every time I get a handle on things, something unexpected comes up, like orthodontist fees or a big car repair. I know what I am SUPPOSED to do, but it is hard! I was glad to see someone tackle the budgeting challenges of the irregular income – well done! I know I am good at many things financially, but this remains one of my biggest challenges! Great article!

  • Cathie says:

    Seems so simple, but I really needed to read this. My husband is a salesman, and gets paid commission ONLY. On no set schedule. My salary is stable, but it’s the lower of the two. Now I know how to plan accordingly. Thanks!

  • Little House says:

    Our income has been irregular for years, but it follows a cycle so I can plan for the lean months. The only time it gets really tough is when the expected great months are lean, too. Hopefully, I’ll eventually have one solid income soon (I’m crossing my fingers!) and then be able to plan better for the irregular money.

  • Anastasia says:

    Hi, Jackie – I liked your categories. The Doh one particularly :) Good stuff, and very practical.

  • Marvin says:

    When I was still single I lived on an irregular income for a brief period. I would always have 3 months of expenses saved up and would maintain that cushion before spending money elsewhere. Great article!

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