Budgeting with an irregular income can be stressful. You’re not sure how much money you’re going to be bringing in month-to-month and figuring out your spending and money goals overwhelms you.
If this is you, here are 5 ways to budget with an irregular income that will ease the stress and anxiety of working on commission or as an independent contractor.
1. Make your emergency fund a priority
The first and most crucial step to budgeting with an irregular income is to make your emergency fund a top priority. Not only will this safeguard you in the event of a loss of income but emergency funds are a way to mitigate anxiety surrounding the “what ifs” of irregular incomes.
If you can’t predict the exact amount you will be bringing in each month, you need to protect yourself against falling back into debt, or if you come up short on your income.
In case you need more reason to save an emergency fund, data from the Federal Reserve shows that nearly 40% of Americans cannot handle a $400 emergency. That means that Americans are burying themselves in even more debt to take care of emergencies that they could have avoided with having an emergency fund.
My recommendation is to save at least one month’s worth of expenses initially… but don’t think you’re off the hook once you have saved that amount. Each and every paycheck, allocate a small percentage to continually grow your emergency fund.
Don’t be unprepared for emergencies and don’t get into debt because of them, because emergencies will happen.
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2. Use a baseline income to budget
Budgeting with an irregular income is different, but not impossible! Once you have established what you need to save for your one month initial emergency fund, create a budget using an average baseline of income.
To do this, average out your income over the last 6 months and budget based off of that average number. Word to the wise: Take this baseline income from normal months and not busy seasons. For example, if you make a larger-than-average income around the holidays, avoid averaging 6 months with those months included.
The goal of baseline income budgets is to have a very average income expectation, that way, you don’t go over or under budget.
During months you make more than average, save it so you have extra during months you make less than average.
3. Get one month ahead on expenses
You’ll notice that budgeting with an irregular income has less to do with logistics and more to do with being prepared! That’s why, in addition to a minimum one month emergency fund, you need to get one month ahead on expenses. Here’s how I suggest accomplishing this goal, which seems unattainable, but is a matter of patience.
Having one month’s worth of expenses in your checking account at all times is a way to break the toxic paycheck-to-paycheck cycle. Once you have your minimum one month emergency fund set up and you’re working off of a baseline budget, use the leftover money from your budget, or any excess money that exceeded your baseline budget, and use that money as a buffer in your checking account.
If you don’t have an income to sustain this method of getting one month ahead on expenses, there are other ways you can accomplish this goal:
- Get a side hustle to increase your income and put your profits after taxes towards your one month ahead checking account buffer
- Sell things that you do not use and put your profits towards your one month ahead checking account buffer
- Cancel subscriptions or services that you do not use and put the saved money towards your one month ahead checking account buffer
- Save any unexpected windfalls and put it in your one month ahead checking account buffer
Don’t be afraid to get creative, thrifty, or frugal to meet this goal, because this is a step that will change your life, even if you’re not on an irregular income.
4. Plan for your goals
When you budget with an irregular income, you have to be more intentional about meeting your financial goals. Why? Because the timelines you plan aren’t set in stone — they may vary due to your income inconsistencies.
That’s okay though, because when you plan to reach your goals, you’re already halfway there. Part of your baseline budget should include putting money towards your financial goals.
Do you want to save up for a down payment on a home? Have a line item in your budget just for that.
Do you want to go on a vacation next year? Have a line item in your budget for that.
Do you want to buy a new-to-you car? Have a line item in your budget for that.
Sometimes when we work on commission, or we have an inconsistent income, it’s very easy to just live day-to-day because we assume planning isn’t something that we can do with the level of uncertainty we have surrounding our income. This is especially true if you live paycheck-to-paycheck.
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Take a step back from “right now” and explore your financial goals over the next one to two years down the road. This way, you give yourself space to dream about what you can do with your hard earned money and you give yourself plenty of time to make those plans a reality, even with an inconsistent income!
5. Budget per paycheck
The last and final tip for budgeting with an irregular income is to budget each and every pay period. This is more time consuming and requires a more intimate knowledge of what is happening in your day-to-day financial life, but it will help you stay on track with your goals and give you a better understanding of your income variations.
This is an especially helpful tip if that income variation is large and you really don’t have a good idea of what your “baseline” really looks like.
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