The Best Budgeting Advice for an Irregular Income

I usually write about things related to my field and while finances and budgeting are not something I studied in school, I have had to learn since I’m self-employed and my paychecks vary.

Budgeting with a regular paycheck is challenging enough and being a freelancer or entrepreneur with irregular paychecks or variable income can be overwhelming. If you find yourself living the high life some months and other months barely able to make ends meet or if you are having a hard time trying to figure out how to make your money work best for you, then this post is for you.

FIGURE OUT YOUR INCOME AND EXPENSES

In order to create a budget, the first step is calculating how much is coming in and how much needs to go out. This can be a little challenging with an irregular paycheck, especially if you are just starting out and not sure which months will be ‘gold.’

Go over bank statements, tips and paychecks for the past year, add up your earnings each month and determine what you earned in your lowest month and in your highest month. We will be using earnings from the lowest month as a guide. It is easier to figure out how to budget the extra money then it is to start ‘taking away’ if you try to use higher income as a guide.

Next, add up all your fixed expenses (rent/mortgage, transportation, insurance, utilities). Then, figure out your variable expenses (savings, emergency fund, gifts, medical, personal, gym memberships, food, etc..). Note your fixed expenses in order of importance, then list your variable expenses (You don’t need to put amounts down in this step. That will be discussed later.) Apps like Quick Books or Stride help you keep track of expenses, taxes and mileage, which can also help you at tax time. If you’re not sure what what you spend on a regular basis, use an app to help you for 1 or 2 months before you sit down to create your budget.

CREATE YOUR BUDGET

We are going to use the 50/30/20 rule (50% needs, 30% wants, 20% savings and debt) as a guide. These amounts are based off net income after taxes. If taxes are not being deducted from your paycheck, figure out how much you need to set aside for taxes. If you are not sure, see a tax preparer or accountant to get an idea. The apps I mentioned above can also be used as a guide.

NEEDS: 50% of your income

These are exactly what you think of when you consider your needs. Necessities include housing, food, transportation (car payment and gas or public transportation), insurance, utilities, work uniform, child care expenses, loans (student loans, tax debts) and your minimum credit card payments.

WANTS: 30% of your income

These include nonessential, personal expenses and things you do/use for fun, such as clothing, gym memberships, subscriptions, entertainment, dining out, and vacations.

SAVINGS/DEBT: 20% of your income

This includes payments to credit cards beyond the minimum to help you pay these debts down, savings for future/retirement and savings for emergency fund.

DIVVY UP YOUR INCOME

Use your lowest month’s income to figure out your budget using the 50/30/20 rule. First calculate all your needs and determine if they equal 50% of your net income. If you did not earn enough in your lowest month to meet all your needs or your needs total more than 50% of your net income, you may need to consider taking on a part time job.

Then set aside 20% of your budget for savings. Calculate what 20% of your budget is and divide this amount into savings for emergency fund. Once you have enough for 1 month of bills you can start putting the rest to saving for the future/retirement, paying down debts and adding to emergency fund until you have enough to cover 6 months of needs.

Lastly, determine how much you spend for wants. Using an envelope system has worked great for many people.

HIGHER MONTHS

Months in which you earn more than your ‘lowest’ month, you can divide your additional earnings into savings and wants. Based on the same rule of budgeting that we have been using, 60% of this income would go to wants and 40% would go to savings (assuming all your needs are being taken care of). For example, if you earn $500 more this month, than $300 would go to wants and $200 would go to savings.

TWEEK YOUR BUDGET

At the end of every month, take a look at your budget. See what you may be spending a lot on and see if you can spend a little less. Try to have nothing left at the end of the month (zero-based budget-every dollar you earn has been allocated for and has a purpose).

If you want to learn more about budgeting, the envelope system or what has worked for me, comment below. With practice, patience and determination, this method can help you achieve your financial goals.