Budgeting can be a daunting task and can seem even harder if you have to budget with irregular income. Follow these simple steps to learn how to budget with irregular income. If your income fluctuates from week to week or month to month and you are sick of living paycheck to paycheck, this budgeting process is a great place to start.
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What is Irregular Income?
Irregular income is income that you receive in variable amounts or at different times during the month. There are many reasons people have irregular income: sales/commission based income, piece rate, hourly with variable hours, freelancer, self employed, etc. Money comes in unevenly and your income can vary from month to month.
Ugh, what a pain in the butt to budget with irregular income, huh? Believe me, I know how you feel.
Since my husband and I have been married (21+ years), we have lived on irregular income. When we were a one income family and now that we are a two income family, we still have to budget with irregular income. In the beginning, this was tough. I had no idea how to budget this way. Since our income was not coming in at the same amount every pay period, I could not just divide it up into when it was due. Our paychecks can vary greatly, even now, sometimes one check can be $1,000 more than the previous. It’s not always easy to budget your money like that.
Many people that have irregular income say, why budget? It’s just too hard. Nope, not hard at all, it just forces you to really examine what your priorities are with your money.
First things first, when you are living with irregular income, it is really important to have an emergency fund set up. $1000 to $1500 is a great amount to start at. Emergencies are inevitable and you really should be prepared for them financially. Make sure that your emergency fund is set up in a different bank account so you are not tempted to spend it during the month. That emergency fund is for true emergencies only (not that great pair of shoes on sale), true emergencies like when the washer breaks or the basement floods.
Setting up the Budget
The type of budget that works best with irregular income is called a zero based budget, or a zero sum budget. This means that you are working your way down to zero. Income minus expenses equals zero. You don’t just want to track your expenses, you want to tell your money where to go.
You can more than likely come up with a close estimate of what is coming in for the next month as far as your income goes. Figure out the minimum amount of money that you need to survive.
Prioritize your Spending
You first need to start with a priority list of bills. This list should be separated into a few categories:
4 walls – basic necessities: basic shelter, food, transportation, basic clothing. These are your highest priority items to get paid. Basic shelter includes mortgage/rent, insurance, water bill, electricity, heating, property taxes. Food includes the essentials to provide solid nutrition. The essentials does not include soda, beer, or any other luxury food items. Transportation includes whatever it takes to get you back and forth to work the cheapest way possible. Basic clothing, if you absolutely NEED something, this would be included, like new work shoes because your others are worn out.
Lower priority items: debt payment, entertainment, dining out, education, charity. If you are not sure about your expenses, look at a few past bank statements to see where you are spending money. Savings, sinking/rainy day funds are included in this part of your priority list.
So now that you have this priority payment list, you know what to pay when your paycheck comes in.
First paycheck of the month = $1300
Rent/utilities – $1100
Groceries – $95
Gas – $30
Debt – $75
$0 left until the next paycheck comes in. You might have to get creative with your meals and what is in your pantry until you get paid again. (You can download this exact spreadsheet below)
So the next time you receive money, you start making your way down your list. More utilities due, gas for the rest of the month, food and then debt repayment. Just keep going through your priority list until everything is fully funded. If you have more money, set it aside for the next month in a separate account. This will start your buffer.
It will be very important for you to create some sort of buffer to get you through the lean months. If you have been budgeting irregular income for any amount of time, you generally know what months you might be short. So you tuck some extra money away when you can. This is different from your emergency fund.
This really is not hard to get used to doing. Like I said, we have been living like this for so long that if our income was a set amount, I wouldn’t know what to do! I have always had to be creative and prioritize our bills.
You will eventually get to where you are paying your bills one month in advance, or creating a full month buffer.
Repeat this process
You will repeat this process every month. Your priority list probably will not change much from month to month. This will take a few months to get used to and to get going. Give yourself some time and some grace.
You know this is going to happen – you are going to have an amazing month and your income is going to be DOUBLE than what it usually is. WAIT!! It is not time to go to Disneyland or on a cruise! It is time to pay down debt if you have it, fund your sinking funds, or stick the rest of that money in your buffer account. Save it for that rainy day that you know is coming.
Budgeting with an Irregular Income
Creating a budget with an irregular income is a necessity. It will give you such peace of mind knowing that you have a plan for all of your money. If you want to do more than just get by and stop living paycheck to paycheck, this spending plan must become your go to every time you get paid.
I tried to do this on paper for many years and it just did not work (I wish I had designed my spreadsheet way back when, it is awesome!). I would get so discouraged and just go back to winging it instead of planning where our dollars needed to go. Then I discovered YNAB, You Need a Budget, about 8 years ago. This budgeting program is zero based and helps you create a buffer. I could not live without it. In my humble opinion, it is worth its weight in gold.
Whether you choose to use the free spreadsheet that you can download above or you give YNAB a try or you figure out your own process, the most important thing is to have a priority list and a spending plan so you can budget your irregular income.