10 Steps to Budgeting with Irregular Income

Posted on November 11, 2008
Filed Under Income, budget, emergency fund |

If you look around the web, you will find plenty of advice on making a budget. It’s actually pretty simple to do. You write down your income and keep track of your spending. You analyze your spending habits and adjust accordingly. The process is simple, right?

Ah, but if you are like me and you do not have a steady paycheck with a set amount of income, how do you budget? How can you plan your spending every month if you don’t know exactly what your income will be? What do you do if you don’t have enough income? What do you do when you have more than you expected?

If you have irregular income, you really need to budget more than people with a fixed income. You need to plan ahead for both the slack months and the months with excess income, otherwise you will find yourself in the debt hole.

Steps to Irregular Income Budgeting

Go back over your income for the last 12 months or as far back as you can. Write down your total income per month. You can use your bank statements, receipt books, paycheck stubs, etc. If you are in a seasonal business, you will probably notice a trend of which months are good and which aren’t.
Total your monthly income and divide by the number of months that you have to determine your monthly average income. Write down your monthly average. Look at the months with the least amount of income and write down the two lowest.
Determine your monthly spending. Write down the amount spent, who it went to and label it as necessary, perk or waste. Bills such as rent, mortgage, heat, groceries, health insurance and debt payments are pretty much necessary. Movies, dinners out, vacations, entertainment may be labeled as a perk. Money spent at Starbucks, the local convenience store, etc may be something you want to label as waste. It’s up to you to decide what the basic necessities of your life are.
Prioritize your necessary bills. Make a list of your bills in order of importance. For most of us, the mortgage or rent is going to be on the top of the list. The next thing may be the utility bills and then any debts for cars, credit cards, etc. The list should include who the payment is going to, the amount and then keep a running total. It would look like this Name ***** Amount***** Total so that when you are done, the total column will show the total amount you need to pay by the end of the month.
Analyze. Go back to your monthly income and look at the two lowest months. If you were to only earn this amount, would it be enough to pay all your bills and still allow you living expenses? How many months does your income fall below the amount of your monthly bills? Would the average monthly income be enough? How much do you have left over in the months with excess income?
Annualize. Take your necessary expenses monthly and add them up to get an annual amount. Subtract it from your annual income. If the result is a negative number then you need to either reduce your spending or increase your income. If it is a positive number then you can move to the next step.
Take the months where your monthly income is below your monthly spending and subtract the amount you spend from your income for that month. This should be a negative number and we are going to call it the shortfall.
Establish a shortfall fund. While there is lots of talk about an emergency fund in personal finance, if you have an irregular income, you need to establish a fund for those months where your income is at a low point. This is not an emergency fund, this is money planned to meet those normal everyday living expenses that you have to pay even when your income is not enough. The shortfall fund should not replace your emergency fund. Your goal should be to have an amount equal to the shortfall you determined in the previous step. On months where you have more income than your spending, put that money towards your shortfall fund until it reaches the annual shortfall amount.
Pay bills in order of priority. When you pay bills, pay them in the order of priority and mark them off the list as you go. You should be able to look at your list and determine exactly how many you can pay.
Eliminate Waste. You designated a certain amount of your spending as waste. Get rid of it and put that money towards establishing either your emergency fund or your shortfall fund.

Budgeting on irregular income is not easy. It does require planning and saving to not end up with more month than you have money. I personally have found that I have to put a certain percentage of my income into savings before I spend a single penny of it. Otherwise it will get frittered away on important but probably unnecessary things.

Do you have an irregular income? Any additional tips on how to budget for it? I’d love to hear from you regarding challenges and successes with it.

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Comments

8 Responses to “10 Steps to Budgeting with Irregular Income”

Denise (18 comments.) on November 11th, 2008 8:16 pm

I work retail and my husband owns a small business and we both have very irregular income. Budgeting used to be a nightmare but we took Dave Ramsey’s advice and that saved our rears. We basically spend every penny (on paper) before we get it. We didn’t do all the steps you mention in this entry and our system is very simple.

We use the envelope system for both personal and business expenses and as cash comes in some is put in the bank and some is put in the envelopes. A priority is getting cash in the envelope for each bill. Checks are deposited in the bank and as a bill comes due, the money for that bill is put in the bank and the bill is paid. It’s a simplistic way to do things but it works for us. For over a year, the bills have been paid on time and we have money saved. Pretty neat, huh?
cindys on November 11th, 2008 8:42 pm

Denise, I also used the envelope system. You are right it is very simple to do. Where it didn’t work for me was the months when I did not have enough income to cover my basic living expxenses. I have found that I have to plan in advance to cover those months. It really helped me to plan and save ahead for the months where I would fall short.
marci on November 11th, 2008 8:51 pm

For me, the secret was learning to live year round on the lowest monthly income. It took a lot of chipping away to get all the expenses down to fit into the lowest monthly income, but once done, the rest fell into place.

Then put the whole paycheck into savings, and only write out into checking the amount needed for that lowest month. It’s totally no frills, but the savings does pile up!
cindys on November 11th, 2008 8:55 pm

Marci, that would work too. I just don’t know how I can whittle my living expenses down any further but then I have a couple of months with really low income and a couple with high income. The rest fall into the average range and I can live on that if I plan for the short months.
Denise (18 comments.) on November 12th, 2008 10:12 am

For awhile we had times with very low income also. The only suggestions I have for those times (beside being incredibly frugal) are to make sure you have padding left from the higher income times and to possibly find ways to earn more money.

When DH has a good week/month with his business, most of the extra money is put aside and simply not spent. If we do this consistently when the slower times come we have enough saved to get us through those times.
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Miranda (1 comments.) on November 12th, 2008 5:02 pm

Great ideas here! I especially like the priority point. We have a couple of bits of income that we can count on (my husband’s research stipend and one of my gigs), but the rest is up in the air. So we prioritize and set aside money for what we need first, at the beginning of the month. Then we can pay for wants later on as the rest of the income comes in.
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