How to Budget on an Irregular Income
A follower on Instagram recently reached out to me asking for budgeting help because of her irregular income. She said:
“Hi! As an independent consultant, my income is all over the place. I am determined to make a budget and start paying off debt—I just feel my irregular income makes it impossible. Do you have any tips on how to budget when you have an inconsistent income?”
Not surprisingly, this is a question I get a lot.
And it’s probably because so many of you get paid inconsistently. According to at least one article from Forbes, a third of Americans have irregular income streams.
And this report, from the Federal Reserve, sums up the problem of budgeting while on an inconsistent income perfectly. The survey considered how mismatches between the timing of income and expenses leads to financial challenges. Some families can manage the frequent changes in income easily, but for others, irregular or inconsistent income causes financial hardship. According to the report:
“One-third of those with varying income,
or 1 in 10 adults overall, say they struggled to pay
their bills at least once in the prior year due to varying income.
”
Further, millions of Americans simply don’t know what their monthly income is because it’s unsteady and unpredictable. Whether you earn commission, wait tables, or are an entrepreneur, you may be faced with income that is inconsistent.
I know for some of you, budgeting can be complicated enough—even when your income is consistent and predictable. But, when you have no idea how much money is coming in or when, it’s easy to assume budgeting can be especially difficult, if not altogether impossible. But, it doesn’t have to be!
In this post, I’m going to walk you through how to make a budget when you have an irregular income and give you 3 strategies for budgeting when your income is unpredictable.
But before we get started, here are some other budget posts you may want to check out:
My Number 1 Must-Have Budgeting App
How to Budget When You Have No Idea What You’re Doing
Six Reasons You’re Failing at Budgeting
Eight Simple Tips to Help You Stick to Your Budget
Ok. Ready to get started? Let’s dive in!
How To Budget on an Irregular Income
Here are three simple strategies to use when faced with budgeting on an irregular income.
Strategy 1: List Your Expenses from Most Important to Least Important & Create a Budget Based on Your Lowest Expected Monthly Income
First, make a list of all your expenses.
Sit down and write out a list of all your expenses. Include everything you pay for on a monthly basis: mortgage/rent, electricity, groceries, gasoline, cell phone, auto insurance, Netflix/Hulu, Spotify, you name it. If you pay for it, add it to the list.
Next, order your list from most to least important. Here’s a tip: food, shelter, transportation, and clothing should all come first. Unnecessary expenses like eating out and entertainment should come last.
Then, Create a Budget Based on Your Lowest Expected Monthly Income
Next, create a budget based on the lowest amount you expect to bring in per month. To determine your lowest income month, go back through your bank statements and review your income for the past 12 months. If you haven’t been earning an irregular income that long, go back as far as you can, until you can reasonably assess your lowest expected monthly income. You’ll then make your monthly budget based off that figure.
Here’s what it’ll look like in action:
Let’s assume, at a bare minimum, you know you will bring in $1,000/month. Some months may be better, but no matter what, you know at least $1,000 will be coming in.
You should then make your budget budget based off $1,000/month and only $1,000.
When you get that $1,000, go down the list you made in step 1 and start paying those bills. If the $1,000 doesn’t cover everything on the list, that’s okay. When any additional money comes in during the month, continue going down your list, paying things in order. Once you’ve paid everything, anything extra can be sent to savings, paying down debt, or investing, depending on where you are in the baby steps. If you consistently don’t earn enough to cover it all, it’s time to start looking at options to increase income or decrease expenses, or both.
Strategy 2 - Create a Buffer or Cushion Fund
Another strategy is to save and use a buffer or cushion fund. A buffer or cushion will come to your rescue during those months when you don’t earn enough to cover your regular monthly expenses.
There are lots of ways to start a buffer/cushion.
When you have a particularly good month, set aside some money in your buffer or cushion fund to pull from during lean months. Host a garage sale and use all the money earned to kick-start your buffer/cushion. Or, scour the house and list unwanted clutter for sale online through sites like Facebook Marketplace, Craigslist, Mercari, or Poshmark. If needed, pick up a part-time job—just temporarily—to help get your cushion in place.
Your buffer or cushion is separate from your emergency fund. It’s sole purpose is to help you meet monthly expenses without turning to credit cards or digging yourself deeper in to debt.
Replenish your buffer during your good months, so on a go-forward basis, you’ll be able to budget without stress or worry.
Strategy 3: Get One Month Ahead and Live on Last Month’s Income
Finally, I saved my favorite strategy for last. If I had an irregular income, this is the strategy I would use because its simply makes the most sense to me and seems to provide the most stability and ease—things I personally crave where finances are concerned. This strategy is from the book You Need A Budget (“YNAB”).
With this strategy, you save up an entire month’s worth of expenses. I admit this may take quite some time to do, but I promise you, you can do it, and it is worth it—simply to eliminate the stressful guessing game of “how much money will we make this month?” “Will there be enough to cover the bills?”
After you save up one month’s worth of expenses, you live on it, while saving the current month’s paychecks for next month.
YNAB explains it like this:
“Save enough money to go an entire month without touching your regular income. Then the next month, spend last month's income while earning this month's income. You'll spend this month's income next month.”
So, for example, let’s say you finished saving up one month’s expenses at the end of December. Live off that savings during January, while saving January’s paychecks. When February 1 rolls around, you will have all of January’s income ready and waiting for you to budget and use. There will be no guessing game. You’ll know exactly how much you have to budget for the month and can create a zero-based budget based on it. Keep going for infinity and forever eliminate the guessing game of predicting your income.
One Last Tip: Don’t Forget About Irregular Expenses, Too
Just like income, expenses can come on an irregular basis as well. These include expenses like federal and state income taxes, annual property taxes, annual HOA dues and the like. Be sure to save up 1/12 of any annual expense each month when you create your budget. For example, if you know you have to pay annual HOA dues each year of $1,200, set aside $100 per month to meet that expense at the end of the year. This is called a sinking fund and you can read all about them here and here.
Additionally, if you are being paid irregularly, chances are income taxes are not being withheld from your pay. That can create a disaster at tax time. Don’t forget to set aside money to pay income taxes if taxes are not being withheld from your irregular income. It’s often recommended that you set aside 25% - 30% of your income for taxes.
Budgeting Forms For Irregular Income
In my Financial Freedom Flexpack, I have all the forms you need to get started to get your finances in order once and for all. You can use the Monthly Bill Overview to list your expenses from most important to least important, as discussed in Strategy 1, above. The Flexpack even includes an Annual Expense Tracker and 20 common items that people forget to budget for, which will help you when planning your budgets!
For a complete bundle of worksheets and customizable printables that will help you complete your budget, realize where your money is going, and get control of your finances once and for all, check out my Financial Freedom Flexpack. You’ll get all these sheets and more!
Yearly Goals Sheet
Annual Expense Tracker
Automatic Payments Tracker
Monthly Bill Overview
Bills by Payday Overview
Monthly Planning Worksheets
Budget Worksheets - Monthly & Paycheck Editions
Expense Tracker Sheets
Monthly Budget Review Sheets
Complete Debt Overview
Debt Pay Off Plan
Debt Pay Off Tracker
Savings Tracker
Your Turn!
Have you ever had to budget on an irregular income? How did you do it? What were your biggest challenges and how did you make it work for you? I’d love to hear in the comments below!
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