How to budget when you have an irregular income

Irregular income budgeting for gig workers and business owners.

Budgeting advice articles often start with this guideline: “Determine your regular monthly income.”

That’s great for people who bring home steady paychecks. But if you own a small business, rely on sales commissions or do freelance or temp work, your monthly income can fluctuate wildly. So how do you create a monthly budget when you’re never quite sure how much money you’ll earn? Is it even worth doing an irregular income budget?

The answer is yes. Actually, it’s even more important to have a budget if your earnings fluctuate from month to month.

Without a clear financial plan, it can be easy to lose track of spending and rack up debt. On the flip side, you might stress out and avoid making important financial commitments—such as investing in your business, putting away money for college savings or saving for retirement. Neither extreme is ideal.

The answer is an irregular income budget. It’s slightly different, but no harder to create, than a steady income budget. Here’s a step-by-step plan for bringing your fluctuating income into line.

1. Establish a baseline monthly income

This is your “I can count on earning this much no matter what” income. To determine it, look back at your bank statements or accounting records. Use your lowest monthly income over the past year as your baseline income. This should be your net monthly earnings after you set aside what you’ll owe in estimated taxes. Learn more about calculating those taxes here.

2. Make a list of required monthly expenses

We’re talking about your critical, must-pay monthly bills. These include mortgage/rent, utilities, food, insurance and minimum required debt payments. Your baseline income may not cover all of your monthly expenses, and that’s OK. Hang tight. That’s next.

3. Pinpoint other monthly expenses

These items might include a few bills you can’t pay during tough months when you earn only your bare-minimum baseline. However, this list could also include flexible items you’d like to pay for during higher-earning months:

  • Savings goals such as building up a business buffer account (see step 6), saving for your kids’ college expenses or investing for retirement
  • Extra debt payments, including more than the required minimum on your credit cards or extra on a car loan to get it paid off sooner
  • Personal “wants,” such as eating out, an updated phone or a weekend getaway

Make a list of these items in order of importance. Keep the list easily accessible, but don’t do anything with it just yet. Now on to part 2.

4. Use your baseline income

Look at the amount you noodled out in step 1. Transfer this money from your business account to your personal account. Experts recommend keeping business and personal money in separate bank accounts.1

Use this money to pay your required expenses (step 2). So you might pay rent, then put money into a grocery budget, then make your insurance and debt payments, and so on.

If you’ve only earned your baseline income this month, and it doesn’t cover all of your essential expenses, don’t panic. Make a list of what you still haven’t covered. If you get paid for an extra job, or earn an extra commission later in the month or next month, you can use it to pay more of your crucial bills, in order of importance.

5. Include additional earnings

This is the good part! If you earned more than your baseline (step 1), you can use it now. First, make sure you’ve covered any leftover bills from low-income months.

Now move on to nonessential expenses (step 3). Try that new Thai restaurant or put money into savings for an upcoming trip. That’s now possible without worrying about overspending.

One of the smartest things to fund with extra money is a buffer account (see step 6). Get all the details in a minute. But for now, set aside a few bucks here and there into a separate savings account. The goal is to slowly save up money for tough months. How much you tuck away is up to you. A web designer who has only an occasional low month might be comfortable with $1,000 in savings. A seasonal worker like a landscaper might find it helpful to save up to 3 months’ worth of critical expenses.

You probably won’t be able to pay for all of the non-essential expenses on your list and put money in your buffer fund every single month. Just keep a list and tick off the things you want to buy or fund as you go.

6. Create a buffer account for low months

Now about the buffer idea. This additional savings account can be the self-employed or commissioned worker’s secret weapon. Having reserve funds can help give you security and flexibility for when your income isn’t as predictable as you’d like.2

Why? Imagine a roller coaster. You have some great months, where your income skyrockets. That’s the top hump of the roller coaster. You also have some low-earning months. That’s the low dip of the roller coaster. They're great fun when you ride them, but not so fun when they represent the drastic ups and downs of an irregular income.

The good news is that you can smooth out the uncomfortable high-low dips of irregular income planning. Put a little money into a buffer personal savings or business savings account during every high-earning month. That way, you’ll have a safety net from which to draw if you happen to hit a month where you earn less than your baseline.

Once you get into the groove, and with the help of this 6-step irregular income budget, your income may not feel irregular at all.

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