Budgeting with Irregular Income
While budgeting is an important part of financial planning, it is even more so if you do not get a steady paycheck. You need to budget on an irregular income to ensure your bills get paid each month. Otherwise, you may find yourself unable to pay for basic necessities or sitting in the dark when they cut your power.
Living by a monthly budget is good advice whether you work on commission, are seasonal, or have a fledgling business venture. It requires discipline and determination, but ultimately will help you reach your financial goals. Monthly assessments will show you where you are in your financial planning. It will also help map out where you want to be. When you track your budget, you are better able to plan for the future since you have a firm grasp on the current situation.
4 Budgeting Strategies for an Irregular Income
No matter which strategy you choose, each one starts with the same basic steps. First you need to figure out how much you spend each month. Sit down and calculate all your expenses to determine your bare bones budget. Start with basic necessities like food, shelter, utilities, and transportation costs. Also be sure to include debt repayments and recurring charges for things like insurance, phone bills, and medical expenses.
When you budget on an irregular income, your monthly earnings will fluctuate. If you earn more than expected, use the extra money in constructive ways. You should also contribute regularly to your emergency fund. In the beginning, you may need to eliminate entertainment expenses or other extras during leaner months. Some people have difficulty with this, so you can categorize your expenses to help you determine what to cut.
There is no one-size-fits-all approach when it comes to budgeting strategies. However, here are some of the most common ones people utilize.
1. Make a Budget Based on Your Lowest Monthly Income.
This method is by far one of the simplest, although it is also the most restrictive. All you need to do is check your pay stubs for the lowest monthly income, and use that figure for your monthly goal. People who use this approach believe it is easier to increase your limit rather than cutting your budget. You can always make adjustments for those months when you have more coming in as well. Practicing monthly assessments can keep you on track and better control your finances.
2. Make a Budget Using Your Average Monthly Income.
This is a good option for those who have had irregular income for several years. Instead of using the lowest number, another way to budget on an irregular income is to figure your average monthly income. Look at your pay checks from several years to create a clearer, more accurate picture. To find your average monthly income, add up each paycheck from the entire year. Then, divide by 12 to calculate your average net income each month. One special consideration is if you are self-employed. Be sure to include the added expense for end-of-the-year tax payments.
3. Set Up a Holding Account
A third alternative is to create an account where you deposit all you funds. It includes your income, gifts, tax returns, bonuses, loans and any other money you receive. With this strategy, you pay yourself a monthly allowance based on your projected budget. You will have a larger balance during higher earning periods, and a smaller one when you have less money flowing in.
Despite fluctuations, the amount you pay yourself each month does not change. It is a good strategy for students who must budget using one large lump sum. The account’s balance swells with grant money, loans, scholarships and savings from summer jobs. Therefore, it is very easy to become careless and overspend. So, this is an effective method to ensure your money does not run out. It is also good practice for budgeting on a salary.
4. Maintain Separate Budgets through Good and Lean Times.
The fourth option is a bit more complicated, but it allows the greatest fluidity. With this method, you create two different budgets: one for those months when income is steady and one to see you through scarcity. However, be forewarned that it can be difficult for people who need more consistency. You must regularly change your spending habits based on the ebb and flow of your finances.
With the constant change, you may feel deprived when you have to live on a stricter budget. This approach is also very risky for those with little self-discipline. Once you blow your budget, it is a slippery slope into negative spending patterns. When you budget on an irregular income, it is convenient to rely on credit to see you through the hard times. However, this creates more debt in the long run and less financial independence.
Working Out the Bugs
When you first implement a new budget, expect a learning curve as you adjust to your new strategy. Having an irregular income requires you to be flexible and adaptable. Living within your means seems simple on paper, but it is not always a smooth transition. You will need to tweak your budget and adjust your spending habits accordingly.
The key is learning to live within your budget and learning to say no when money is tight. This means denying yourself unnecessary expenditures when you have to trim the fat on your spending. Giving up your indulgent spending habits is an unpleasant, but crucial step in keeping to a budget. You have to learn to stick to a plan and avoid impulse buying.
Additionally, you also must plan ahead for large expenses and include them in your savings plan. During the months with higher earnings, find a place to put your money to work for you. It serves no purpose sitting in a low interest account, losing value. Instead, you can put it in an emergency fund in case of any surprises. Another option would be paying down your debt or investing it.
At the end of the day, there is no right or wrong answer for choosing a budget on an irregular income. Sometimes the best approach is through trial and error to determine which strategy is best for you.