Budgeting With Irregular Income
How did it happen again? It’s the 20th of the month, and there’s less than $100 in the bank. You have a few shifts scheduled for next week, but your paycheck won’t come until the 1st day of next month. You budgeted. You even stuck to your spending target. But still, there’s not enough money. What went wrong?
Well, every budget has two components: money-out (spending) and money-in (income). Even if you stick to your money-out target, you might still run out of funds if your budgeted money-in was wrong.
Sometimes you won’t know how many shifts you’ll get in a month or how much you’ll earn during those shifts. Is it just impossible to budget with irregular income? No! If it was, we wouldn’t have written this article.
While not impossible, it is harder to build an accurate budget when you can’t reliably predict your income. That’s why we’re here with tips for building a useful budget when your income varies month-to-month!
Build a low-income, low-spend budget
Start with the lowest amount you might earn. We’ll call this amount your income floor.
How to estimate your income floor? Look back at the paychecks you’ve earned at your current pay-rate. The lowest amount you’ve brought home in a month at that rate is a good starting point for estimating your income floor.
What led that month’s earnings to be lower than other months? Did you get sick and have to miss a week? Did a natural disaster shut down your workplace for a bit? If something crazy happened to keep you out of the office, you can adjust your income floor upward. The goal is intended to estimate the lowest amount you would bring home if the month you’re budgeting for is ‘normal’.
Using your income floor estimate, you can build a low-income, low-spend budget. If you’re a first time budgeter or would simply like a refresher, check out our article on building a budget.
If you wind up bringing home your income floor, there probably won’t be much room in your budget for entertainment or other stuff that you want, but don’t necessarily need. Cut those items from your low-income, low-spend budget! Take a spin through our article on wants vs needs for pointers on deciding what’s essential and what can be cut.
It’s possible that your budget won’t balance like you want it to. No need to stress! Now is the time to think through how you would cover the gap between your income floor and spending needs. Do you have family or friends you could borrow from? Is there another income source you could tap?
If bringing home your income floor means you’ll have a budget gap, it’s an especially good idea to set aside funds in the months you bring home more income, so that you can bridge that gap in future months.
All this talk about income floors and low-spend budgets is weighing on me. Let’s lighten up!
Build a typical-income budget
In most months you’ll bring home more than your income floor. Don’t just budget for the worst! Take another look back at the pay you’ve taken home at your current rate. This time around, we’re looking for a good estimate of your typical income.
Typical income is a bit trickier to find than your income floor. It will be somewhere in-between your highest earning month and your lowest earning month. But where in-between? Is there a small range of amounts you see coming up again and again? If so, that’s a good place to start.
If you’re struggling to narrow it down to a typical income, try this method:
- Make a list from lowest to highest of the income you’ve taken home each month at your current rate.
- If you’ve been at your current rate for less than 10 months, cross off the highest and lowest amounts. If you’ve been at your current rate for more than 10 months, cross off the 2 highest and 2 lowest amounts.
- Add up the remaining amounts.
- Divide the sum by the number of amounts you added up to arrive at your typical income.
Two budgets! What next?
Now you have two budgets. How should you use them? At the beginning of the month, it’s tough to tell how much you’ll be bringing home, so it’s smart to stick to your low-income, low-spend budget. After a week or two you should have a better feel for what your total income will look like for the month. At that point you have 3 options:
- You can continue using your low-income, low-spend budget. This is the safest option, even if you think you’ll earn more than your income floor.
- You can shift gears and use your typical-income budget. This can be a good choice if you think you’ll bring home at least your typical income.
- You can also use a blend of your low-income, low-spend and your typical-income budgets. This option makes sense if you think you’ll earn something between your income floor and your typical income.
- With flexibility you can make your budgets work for you. Don’t let irregular income be a hurdle to financial wellness!
With flexibility you can make your budgets work for you. Don’t let irregular income be a hurdle to financial wellness!