Creating a budget under these circumstances might seem like an impossible task, but it’s probably not as hard as you think. You may find managing your money a lot more simple once you do, too.
Here’s a step-by-step guide for budgeting with an irregular income.
Step 1: Project your income
No matter how irregular your income, you’ll need to make estimates of what you’ll make in future months.
If you’ve been living with inconsistent paychecks for a while, hopefully you’ve tracked your income by month. Once you have an idea of what you’ve made, there are a few approaches you can take.
My favorite method is creating a budget based on your minimum monthly income in the past 12 months. JD brings up some great points about why you shouldn’t use average income since a lower than average income over several months will throw off your budget. If you work off the lowest income, you’ll be more likely to have surplus rather than a deficiency.
If you know you’ll always make at least a certain amount each month, use that number for your budget instead.
If you’ll need every cent of each paycheck to pay your bills, don’t worry about the monthly budget amount but instead focus on prioritizing budget items in a later step.
Step 2: Plug in the numbers
Next, you’ll need to look at your expenses and figure out how much you need to budget for.
This step is really just the same as using a regular budget where you’re setting a certain dollar amount corresponding to each item.
Hopefully you’ll be able to cover your entire budgeted expenses with the income amount from step 1.
Don’t forget to include less-obvious budget items like emergency savings and investments for retirement. Having an emergency account is even more important for those with irregular incomes than those without.
If you’re self-employed, don’t forget to take out taxes, too.
Step 3: Pay yourself
If your entire income is accounted for in your budget and you’ll need it all to pay the bills each month, you might not need this step. But hopefully you already or soon will be earning more than the minimum 12-month amount you chose above.
The best way to ensure you stick to the budget is to make your irregular income feel regular. Have your paychecks deposited into one account, which can be your “business” account. Use a second account to hold the money that will be used for spending and paying bills.
All pay goes into the business account and all that comes out is the amount you’ve budgeted for each month. Just pay yourself this total amount by transferring the funds to the second account once or twice a month.
Pay all your bills and withdraw spending money from this second account only while the first account remains untouched. That way, if you do have a month that’s lower than projected, hopefully your first account will have a bit of a surplus from previous months to cover you.
Step 4: Pay bills in order
If you’ll need every dime of every paycheck to pay your bills, you’ll need to take a slightly different approach. Even if you earn more than your expenses, this step can still be helpful for prioritizing your expenses.
Go back and list out all the typical monthly expenses from step 2 in order from the most important on down. Food and housing costs are likely at the top, whereas entertainment is probably closer to the bottom.
With each item, you should have a budgeted amount. This might not be perfect at first, but use your best guess and you can always adjust in future months.
Dave Ramsey’s worksheet works great for tracking cumulative costs, making it easy to see what one paycheck covers when it comes in.
When you receive money, just pay as much of your expenses from the top down as you can. When the next paycheck comes along, do the same.
For ongoing costs throughout the month, like food or gas, make sure to set aside the money so it’s not mistakenly spent on other things. If you’re disciplined, leaving the money in the bank will be fine. If not, withdraw cash and put it in an envelope.