Managing your finances and trying to budget an irregular income can be difficult when you have an unpredictable money flow. Whether you’re a freelancer, an entrepreneur, or an independent contractor with variable income, budgeting for irregular income can be challenging.
Here are some tips on budgeting when your income isn’t regular, so you can stay on track and enjoy life.
Know How Much You’re Spending
Although you don’t have a steady income, you can always predict your expenses. Therefore, it’s essential to budget for irregular income by knowing how much you spend each month.
While this may take some work, it’s always a good idea to keep track of your expenses to prevent spending beyond what you can.
The first step is to calculate your monthly fixed costs. These expenses mostly stay the same month to month and may include the following:
- Rent or mortgage
- Credit card debt
- Car payment
- Student loans
Reviewing your bank account and credit card statements from the previous three to six months is essential to get a comprehensive view of your fixed monthly expenses.
This will give you an accurate picture of what costs are consistent from month to month. Allocate categories for these bills so that you can track them easily on a budgeting spreadsheet or app.
Be sure to factor in the cost of things such as utilities, which may vary slightly from month to month.
For example, you can calculate annual home insurance or car registration fees into your budget by dividing the amount of money by 12 (or however many months remain until the next payment is due).
It’s also essential to remember any one-time or annual expenses when budgeting for your fixed costs, as they can have a significant impact on your financial health if left unchecked.
The next step would be to calculate your variable expenses.
These expenses are discretionary purchases that fluctuate monthly, making it hard to predict your monthly spending.
Generally, these purchases can range from luxury items such as clothing and vacations to everyday things like eating out or going to the movies. A wide variety of potential expenses could fall under this category.
Many people assume that all discretionary expenses are unnecessary. However, it’s important to remember that some are essential for maintaining health and well-being.
Examples include general personal grooming services and gym memberships which, while not entirely usual, can have practical benefits in terms of self-care and physical fitness.
It’s also important to recognize that even non-essential discretionary expenses should have limits so they don’t strain your budget.
When planning for variable expenses, make sure you factor necessity and enjoyment into the equation to make the best decision for yourself and your financial goals.
Calculate Your Average Monthly Income
Now that you know how much you’re spending, it’s time to calculate how much you’re earning. After all, a reliable estimate of your monthly income is essential in any budgeting process.
Since you have inconsistent income, calculating an average income is the best way to determine your earnings.
To do this, the most straightforward approach is to add up your gross earnings from three to six months and divide it by the number of months.
When you consider multiple months’ worth of earnings, you can get a better sense of any unusual trends or fluctuations that may affect how much money you’ll have in a single month.
Additionally, it’s vital to consider net income (the amount after taxes and deductions) rather than just gross earnings. These are different from equivalent figures.
As a general rule of thumb, set aside 25% to 30% of every paycheck for taxes to ensure that you cover your tax liabilities throughout the year.
Prioritize Your Regular Bills
If you’re not confident that your irregular income will cover your monthly expenses, prioritize regular bills over your variable or “want” expenses.
For instance, pay rent and utilities before entertaining yourself with a new purchase.
It would help if you met regular expenses such as rent, utilities, and grocery bills on time, or you may face hefty late fees or an overdraft at your bank.
This can quickly accumulate into extensive debt that can take years. To avoid this situation, it’s crucial to stay informed about your finances and ensure that there is enough money to cover such costs every month.
One proactive way of ensuring financial security is setting up a separate account for regular expenses.
This way, money will always be available when needed and untouched when it’s not; if the account allows for interest payments, this could provide some additional monetary gains in the months ahead.
This safety net can provide peace of mind knowing that you have taken care of all essential bills at the end of each month.
Draw a Zero-Based Monthly Budget
Zero-based budgeting is vital to sound financial management, but planning for lean months and good ones are imperative.
In good months, when incomes are higher than expected, and expenses are lower, it’s easy to feel like there’s plenty of money to go around. However, the truth is that not all months will be smooth sailing.
There may be periods without income or even high one-time payments that need to be accounted for.
Budgeting for your lowest monthly income is an excellent strategy to look out for low-income months down the road.
This way, if you have a good month with extra income on top of what you originally planned for, you can adjust accordingly.
Staying mindful of regular and unexpected expenses is the key to staying on track during lean times or when faced with large payments you weren’t expecting.
Build Your Emergency Fund
If you don’t have a regular paycheck, are trying to budget irregular income, or rely heavily on side gigs, then you probably don’t benefit from typical safety nets like employee benefits or unemployment insurance.
That’s why having a substantial emergency fund is crucial.
Not only will it offer financial protection should you take time off work due to injury or illness. It can also help protect against the frequent economic ups and downs those in this career field face.
Aiming for three to six months of essential expenses is typically sufficient. However, if you have a particularly variable income or are in an industry with frequent economic changes, 12 months’ worth of expenses may be wise.
It’s best to keep the funds safely stored in a high-yield savings account where it won’t be as easily accessible when tempting spending arises.
Automating routine transfers from checking to saving can make setting money aside easier and less intrusive.
Some examples of when you may need to access your emergency fund savings account include:
- Unexpected job loss
- Major car repairs
- Home repairs or renovations
- Emergency medical bills
- Natural disaster
Pro Tip: You Can Regularly Adjust Your Budget
Of course, you may need help finding a budget that works when you don’t have a steady paycheck. Although it can take some trial and error to get the plan right, there are specific strategies you can use to make sure you are on the right track.
Start by tracking your expenses, as we mentioned before. This will provide essential valuable insights into where and when you have excesses in your spending habits that could be reduced or cut altogether.
Once you have this data, reviewing your budget after the end of each month is essential to assess if you adequately addressed your financial needs or if additional adjustments are needed.
You may decide that you need more than reducing expenses and want to increase your income to tackle more considerable costs or save more money for emergencies.
With time and effort, you will eventually develop a budget plan that works for you and can adjust depending on your fluctuating income.
You will save time and worry later by organizing your finances early on. A dependable system allows you to relax, knowing you control everything.
Save Money As Much as You Can
Lastly, always remember to save some of your hard-earned money.
While this can be laborious, getting a clear picture of all income and expenses is essential.
One positive way to ease this manual process is by automating transfers from your paycheck into a separate savings account, which can help to establish a robust behavioral routine.
Also, whenever you get any unplanned money — such as a tax refund or pay raise — put it into your savings account to reach your savings goals more quickly.
In addition, if one experiences any unexpected influx of extra money — whether through tax refunds, pay raises, or bonuses — it can be instantly put to work by either adding it to your savings or applying it towards debt payments. This is a great way to budget irregular income.
If the priority is debt elimination, this additional money can significantly help by allowing more than the minimum monthly payment. This ultimately saves money in the long run, as interest rates on debt are usually higher than what you can earn through savings accounts.
Automated deposits are an effective way of helping with financial stability and budgeting without too much manual effort involved.
Final Thoughts On How To Budget Irregular Income
Budget irregular income can initially seem overwhelming, but with some strategic planning and tracking of expenses, it doesn’t have to be!
With these tips in mind, managing an unpredictable income stream can become easier if you remain disciplined in sticking to the plan and creating a financial cushion when possible to help support yourself during leaner times.
Stay organized and remember that while it may take some time to get used to this new way of managing finances, it can ultimately lead to financial stability down the road.