When your income doesn’t come in 24 equal payments spaced evenly throughout the year it can be hard to make a budget. Unfortunately, this is a fact that a lot of people deal with in their life. There are a lot of industries where you either get paid on commission or seasonally where the pay is great in the summer time and then tapers off with the chill of winter. Or even vice versa. If you aren’t careful with your budget throughout the year you can find yourself in a pinch in the off-season.
I was talking to a friend of mine who is a realtor. She was saying her income is great in the summer but then in the winter she has a hard time making ends meet. People would prefer to move in the summer since the kids are out of school and the weather is nicer, and no one wants to move around the holidays. She wanted to know how much she should have in her emergency fund to cover her winter expenses.
But I actually felt she was looking at it the wrong way. An emergency fund is for emergencies and her winter expenses aren’t emergencies. She knows these bills are coming, so she should plan for them, outside of her emergency fund.
How To Budget On A Commission Salary
The first thing she needs to do is figure out what her average monthly income is and make a budget based on that average. Using the average will help balance out the highs and the lows of the available income so your budget doesn’t have wild swings.
Let’s look at some pictures. (hand drawn by yours truly)
Here we have her income. The gray curvy line is her income. The black dashed line is her new budget. Now she has a budget that works for her income. Next she needs to start building what I call, her cushion fund.
A cushion fund is money that you set aside to fill in the gaps between your income and your budget. So during the summer months she would build her cushion fund, and in the winter months she would draw from it. This smooths out her income so it’s not wild parties in the summer and Ramen noodles in the winter. It’s just normal life all year-long.
This system allows her to plan for her reduced winter income and also be prepared for a true emergency should one arise. Right now, at the end of summer, she is feeling very stressed knowing her income is going to go down soon. But if she follows this plan, next year will be a different story. She probably still won’t like receiving those smaller checks, but at least she will have a plan to put food on the table.
Do you have an irregular income? How do you handle it?