Budgeting can be a difficult task for anyone. But it’s especially tough when you have an irregular income. If you’re struggling with how to budget on an irregular income, here are some tips to make the process easier.
Know Your Baseline
Knowing the absolute minimum amount of money you need each month will help you plan ahead when you’re budgeting with an irregular income.
Create a bare-bones budget by determining your essential monthly living expenses – things like housing and utilities – and leaving out discretionary expenses like eating out and entertainment.
Once you have your baseline monthly expenses, you’ll know how much monthly income you need to cover your bills.
It’s a good idea to save up at least this amount into an emergency fund.
Create Separate Spending and Saving Accounts
Having an inconsistent income can be a bit of a roller coaster ride if you don’t plan well.
An easy way to safeguard yourself from the ups and downs is to create separate accounts for spending and savings.
This way, you can have a checking account you spend from and a separate savings account that’s strictly designated as a savings fund.
Keeping your money separated will keep you from accidentally overspending and ensure you have savings to draw from during low-income months.
Create a Budget
Having a bare-bones spending plan is helpful, but it’s not always practical.
In order to make a budget you can keep you’ll want to account for discretionary expenses as well.
Ideally, you’ll be making more than is necessary and can incorporate some fun and flexibility into your budget.
Take a look through your last credit card and bank statements to determine your typical expenses.
Draft a budget that includes not just the necessities, but also any other discretionary expenses you value.
While you shouldn’t include expenses like Netflix and eating out into your baseline budget, you should add them to your regular one.
Your budget should be a reflection of your values.
Assuming you’re monthly income is more than your baseline expenses, you’ll want to prioritize your remaining funds to make sure you’re spending accordingly.
Don’t forget to factor in your savings goals and sinking funds.
Budget Every Check or Payment
We often get caught up in budgeting month to month since that’s how most of our bills arrive.
But your budget isn’t a set-it and forget-it type of thing. And with a fluctuating income, it’s even more important to actively update your budget each time you get paid.
When new income comes in, take a look at your budget and your calendar.
Ask yourself “What does this money need to do for me until I get paid again?”
Budget for those expenses first, then factor in the rest of your living expenses.
Don’t forget to contribute to your sinking funds like car insurance and repairs.
By gradually building those funds you can avoid the stress or need to take on debt when those expenses hit.
Live on Last Month’s Income
When you’ve got an irregular income, effective planning is an essential part of budgeting.
One strategy to try is to live on last month’s paycheck.
This means you’ve basically saved up a month’s worth of expenses and can fully fund your monthly budget with the cash in your accounts.
Instead of living paycheck to paycheck, you’ve got a buffer to keep you from taking on debt or stressing out about bills.
Account for Variable & Periodic Expenses
It’s important when you’re making your budget to account for your variable and periodic expenses.
We often forget about expenses like car insurance, property taxes, and holiday gifts which can cause unnecessary stress and increased debt.
Similarly, you can also plan for predictable yet unexpected costs like medical bills or car repairs.
When you’re used to a steady paycheck you may assume you can just pay off your credit card the next time you get paid.
But without having a consistent income, paying for things with credit will likely only lead to credit card debt and cash flow problems.
Since there’s no way to know when an unexpected expense may pop up, plan in advance. Create sinking funds and set some money aside for them each month.
Build a Large Cash Cushion
Living on a variable income can make you more susceptible to economic changes.
Building up a large cash cushion will help you safeguard yourself against persistent months of less income.
Using your bare-bones budget as a guide, build up an emergency savings fund of 3-6 months of expenses.
If you have an irregular income coupled with unexpected expenses, building up a buffer will keep your finances stable in the long term.
Look for Ways to Cut Expenses
It’s easier to budget when you’re not spending more money than you make.
The easiest way to lower your expenses is to adjust your spending habits.
Start tracking your spending and become more intentional when you make a purchase.
Look for ways to cut your expenses, especially in areas that may not align with your goals and priorities.
- Cancel cable TV
- Shop at discount stores
- Cut back on how much you eat out
- Learn to shop smarter
- Purge your subscription services
You can also shop around for better prices on your services and insurance and consider downgrading those you may not really need.
For example, could you cut back on your internet data plan and use your cell phone’s data plan to supplement it?
How about lowering your insurance bill by removing options like towing and lock-out services?
Start Saving for Emergencies
I’ve mentioned setting up an emergency fund and sinking funds already, but it’s worth saying it again.
Unexpected expenses can add stress and debt to your life and a major expense could put you in a real bind.
Your primary financial goal should be to prioritize your emergency fund until it covers a month of your baseline expenses.
At that point, you can decide what to do with any surplus income. Either continue putting as much as possible into your emergency fund or start splitting it up across sinking funds as well.
Having sinking funds will help cover unforeseen and irregular expenses like car repairs, medical bills, and holiday and gift spending.
Having fully funded savings goals can provide significant relief from financial pressures when you need it most.
Use Extra Money Wisely
When you receive extra income (whether from a second job, a tax refund, or even some birthday cash), it can be easy to view it as fun money.
Try to avoid treating unpredictable incomes any differently than your regular income.
When you receive extra cash, prioritize where it needs to go.
Where it “needs” to go will depend on the stability of your variable income, the status of your financial goals, and your priorities.
Maybe debt repayment is a top priority and you funnel all your extra cash toward that. Maybe you’re debt free and working toward financial freedom so sticking it in savings is a priority. Or maybe you’re coasting with a fully funded budget and emergency fund and just want to have a nice dinner out.
It’s not inherently bad to spend money toward more fun or frivolous expenses as long as you’re making deliberate and informed spending decisions.
Create Your Own Predictability
A great way to budget on an irregular income is to create a regular paycheck or average monthly income for yourself.
Put all your earnings into your savings account and then pay yourself a steady income out of that account each month.
Paying yourself an average income each month will level out the ups and downs of having an irregular income. This will create some predictability in your budget.
Try Zero-Based Budgeting
There are many budgeting methods, but a zero-based budget may be ideal for managing a fluctuating income.
A zero-based budget requires you to budget out every dollar you have.
Whether you’re budgeting for expenses or savings, every dollar gets a job.
Using zero-sum budgeting will ensure you don’t overspend without having to hold yourself accountable.
You’ll have to keep track of spending and move money around within your spending categories to deal with any overspending.
Using a zero-based budget gives you a clear picture of your obligations, so you can make more informed financial decisions.
Find Ways to Supplement Your Income
If you’re struggling to get by on your variable income, you may want to start looking for ways to increase your income.
- Increase your hours
- Take on more clients
- Create new products
- Pick up a second job
- Start a side-hustle
- Sell some stuff
There are countless ways to generate more income. You’re really only limited by your imagination. Check out Side Hustle: From Idea to Income in 27 Days for help getting started.
Final Thoughts on How to Budget on an Irregular Income
It can be hard to learn how to budget on an irregular income.
But figuring out your monthly expenses and average monthly income will help you plan ahead and create some stability in your finances.
Even though you may have an inconsistent income, you can add some structure to your money to still make a budget that works for you.