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Budgeting for an Irregular Income

An irregular income can feel like an insurmountable problem when trying to make a budget.  How can you plan where you are going to spend your money when you don’t even know how much money you will have? When your income isn’t steady you do have to go about budgeting in a slightly different way than someone who gets a regular paycheck every two weeks.

The first thing you need to figure out is what your average income is.  This is the amount you should be living on.  Make a monthly budget based on this amount.

You will want to start the month with one month’s pay in your checking account.  You might have to save up for a while before hand to get this.  This plan works for everyone with an irregular income, and even those with a steady income.

On January first (or whatever month) put an entire month’s pay in your account.  You should be able to live for the whole month without any more income.  When you get paid during the month of January do not put it into checking.  Put it all into savings.  (I actually have a separate savings account that I use for this purpose that I call a “cushion fund”.) At the end of January you will have replenished your savings account.  If it was a good month you put in even more than you took out, if it was a bad month you didn’t.

Repeat this process.  On February first refill your checking account with another month’s worth of income and put all of February’s pay into savings.  Keep going with this.  If you are living on less than your average pay your savings account will grow over time.  You have to make sure the average pay that you calculated is correct.  Make sure you are not just draining your savings account.  If you think you need to make adjustments as the year goes on, please do.  This process will get smoother the longer you do it.

This is one reason why I like using a separate savings account as my cushion fund.  That way I can see exactly how much extra income I have stored away.  If the cushion is getting low I know I need to cut back.  My husband’s income is larger in the summer when he is very busy at work, and then smaller in the winter when things slow down.  We save save save all summer and then draw from that fund during the winter.  We don’t experience a lifestyle increase in the summer and then have to pull back in the winter.  We just plug along at our normal style of living all year long.

The budgeting system from You Need A Budget has an excel spreadsheet budget that is made to work on this type of budget, living on last month’s income.   There is a one time fee to download it and I’ve never used it, but it seems interesting.  If you have used it I would love to hear what you think of it.

9 thoughts on “Budgeting for an Irregular Income”

  1. Great tips, Ashley. I think the idea of an “irregular income” is a scary thought to a lot of people (including me). That sounds like a great plan for people that have a regular income, too.

    I’m just curious: do you have ideas for people that don’t have an idea what their “average” income is since they just left a job and might be doing freelancing or running a business?

  2. If you are just starting out on your own I would suggest making and living on a bare bones budget. Hopefully you have some savings set aside for living expenses while business gets going. If business covers expenses right away great, if not, you will have an idea of where you are.

  3. Steve MoneyPlanSOS Stewart

    Great idea. I didn’t realize that we were already doing something similar to the “cushion” fund – we always have enough money in our account to cover one month’s mortgage payment and $200 in groceries.

    I hope I’m not stepping on your blog-toes here but wanted to share a podcast that shows how to create the Absolute Simplest Budget that works – ESPECIALLY for those with irregular income: //www.moneyplansos.com/005-mpsos/

    And to make the process even easier (and more dynamic when the expected income changes) there is an instructional video: //www.youtube.com/watch?v=1VaEuLlfq2A The video is a little long and the instructor is pretty boring, but it works really well and IT’S FREE!

    Ashley, great stuff! Keep up the great posts and I’ll see you on Twitter!

  4. Thank goodness I have a regular income, because I have a hard enough time budgeting that one.

    Living on a bare bones budget is great, unfortunately too many of us have suffered lifestyle inflation already.

    Great tips though!

  5. Hunter - Financially Consumed

    Smoothing out the bumps is not easy but can be managed, as your point out. I worked on 100% commission for a while. I made ZERO for the first three months during training and developing a pipeline of clients. Stressed me out, but thankfully my wife had her stable Government income.

    As long as the total income for a year is still enough to meet the obligations you should be able to develop a plan to make it work.

  6. I do this. I built up a $10,000 cushion account before I quit my day job, then started paying myself $1650 every 2 weeks. Everything I make is diverted into that account and anything over $10,000 at the end of our budget month is split up between other savings. So far, there is always something left to split up…but I am prepared to handle any months that aren’t as lucky.

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