Budgeting with an Irregular Income
It’s common to have irregular income when you’re self-employed. (Unless you’re paying yourself a regular salary, which can happen, depending on the type of business you have.) This is especially common when you’re first starting out. Of course, there are other reasons for having an irregular income too, such as being on commission.
The difference between your income from month to month can be pretty dramatic. For example, one month you might make $500, and another month you might make $9,000. Or you might make nothing for quite some time, and then a little bit, and then a thousand dollars a month for a while. Who knows. That’s what makes it irregular.
The emotional impact
Dealing with an irregular income is just too stressful for some people. Whether or not you’re comfortable with it is going to depend a lot on your personality and your tolerance for uncertainty. My husband, for example, hates the idea of irregular income.
Me, I just hate the $500 months. (Now if there were a whole bunch of $500 months in a row with my business as established as it is, I’d be very worried and busy trying to fix things, but that’s a different matter.)
Budgeting on an irregular income
Surprisingly though, budgeting on an irregular income is not really that different than budgeting on a regular income.
That’s because in both cases, you’ve got a baseline of expenses that you need to meet. So you meet those, and then the rest becomes (first) savings for the lean months and (second) gravy. You probably do the same thing with a regular paycheck without realizing it — making sure you have enough set aside for your bare-minimum expenses, and then deciding how to use the rest.
Long-term thinking
I deal with an irregular income by taking the expression “make hay while the sun shines” to heart. When it’s good, I get out there and make as much of it as I can. And then I store much of it up for later via an emergency fund and a variety of other earmarked funds.
Of course, I spend some too. It’s not all work and no play. But it does require long-term thinking and preparation for the future.
If my income were irregular, I definitely would build up my savings to help me when those gaps occur.
Yup, you want to have money you can depend on.
Could you not average over six months and create a budget based on that? Then you would always have some extra for the lean months.
That would be a good way to find out what the average of your expenses are, so that you have an idea of how much to put aside.
Great blog post. Even more of a reason to save up for those $500 months.
And hopefully there aren’t very many of those!
I would say budget based on the lowest income for a particular month in previous year. Addy additonal income will be a straight save towards retirement or incidental expenses.
Yeah the only problem with that is if your lowest month is very low — so low that you can’t meet all of your normal expenses. Otherwise that would give a good baseline. I guess it depends on just how irregular your income is!
Ideally you should have enough money saved up for at least 6 months before starting a business. Then you can start budgeting with the income you bring in and hopefully you’ll come out at least even.
Yes, having a cushion before starting a business is an excellent idea — or just not quitting your job until and unless your business has taken off and appears to be good for the long haul.
With irregular income, it seems to make sense to budget for some point on the low end of the range of monthly income. Also, building up an emergency fund seems more important in this case. I’d say 9 months or more is what I’d target in that case. Personally, I think the old 3 to 6 month standard recommendation is not enough these days!
Oh, I don’t think 3-6 months is anywhere near enough — even if you do have regular income.
I would be one of those people who freak out at the idea of irregular income. That is the main thing that is stopping me from taking my business to the next level. Pretty pathetic actually. I agree with you, it might not be that different. Just my insecurity. I guess if we have a baseline absolute necessities, nice to haves and splurges… 3 set of budget, it would be easy to digest those $500 months.
Well, knowing yourself is important! :)
But if it’s something you really want to do and that’s the only thing stopping you, you might look into a way to increase your comfort level.
I live in an irregular income and when times are good, I deposit extra funds into a “slush” account that I access when times are lean. It is definitely more stressful living like this, but after a while it becomes the “norm.” I’m not so sure if that’s a good thing or not, but it’s what I’ve become used to. As long as there are good times, I can survive through the not-so-good ones. ;)
It does become the norm, and it is a little more stressful because you’re conscious of the fact that your income might not always be there. I think most folks who are used to a regular salary don’t think about that much, even though a “secure” job isn’t necessarily secure.
Thankfully, I have a regular income… and the “extra” income is the irregular part. I imagine it is extremely difficult to budget when you have such irregularities…. although I suppose a certain amount of income is regular for most.
Yeah that’s the situation I’m in now — with regular income plus extra, which makes it nice. It’s not really hard to budget with irregular income though; what can be hard is just adjusting to the uncertainty and making sure you’re prepared enough for the down times.
As long as the $500 amount keeps getting higher over time, things will work out. :)
Hehe yes, there is that!
It is even difficult for most folks to live on a fixed income because they spend $1.22 for every dollar they earn. They get a $300 raise and celebrate with a $400 car payment. Getting a fully funded emergency fund and on a spend every penny budget is the key..
You know that’s an excellent point. And so many people spend their raises as soon as they find out about them — before they even see how much will make it to their paycheck.
If i am relying on irregular salary, I would definitely save for future purposes and limit my daily expenses to necessities so as not to over spend and leave me broke before i could expect for another irregular salary. Or maybe, if my skills would allow me, i would find myself a regular job that would pay me off regular salary while doing extra for jobs that would pay me off irregular salary.
The second thing you mention is basically what I’ve been doing. It’s a nice mix.