How to Budget on Irregular Income
This is the seventh post in the Creative Savings’ Beginners Guide to Budgeting Series. To read all posts in order, start with Why You Need a Budget, then continue reading the rest of the series on this page.
When I first started this series, I didn’t intend to include a post about budgeting on irregular income. Then I started receiving a ton of questions about it, and realized this is an essential step!
Even though I’ve never lived on an income that changes month-to-month (at least not yet!), we are strongly considering the possibility that Joseph could leave his 9-5 in a few years and help me run Creative Savings full-time. Our income would be completely tied to advertising dollars that go up and down each month, as well as freelance gigs that come and go.
It’s definitely a scary step for us to take, but the reality is, so many of you already experience this.
**UPDATE – This actually happened in October of 2015! I even wrote a post about how I’m earning a full time income blogging. Now I put this post about budgeting on an irregular income into practice every single day.**
Whether your husband is a contractor, self-employed, or commission-based (or you personally hold a similar type of job), you know firsthand the stress of going months at a time without a steady paycheck … and the restless spent nights worrying about whether or not you’ll be able to feed and clothe your family.
Now is the time when you will need to manage money better than ever before. The following steps are some of the best ways I’ve found to do just that. But honestly, those of you in this situation right now can probably speak to this better than I, so please leave your personal tips and suggestions in the comments!
1. Determine Your Priorities from the Top Down
By giving weight to each of your expenses, you can easily figure out what absolutely needs to be covered every month, versus what can wait until you receive a bigger paycheck.
Think about very basic needs here – food, electricity, heat, water, etc – and order them from the most important to the least important. You can use the budget sheet here to help.
Every time you receive a paycheck, start with the most important categories first, and then fill in all your budget envelopes or columns with the amount required to meet your monthly needs. Do this until the entire paycheck has been “used” up.
With this method, you may not always have enough to pay your cable bill, buy clothing, new shoes, or makeup, but at least you will have your top priorities filled, paid for, and provided. That should be a big relief in itself! But if you’re searching for a better way, keep reading. The next two steps are my favorite!
2. Mimic a Steady Paycheck as Much as Possible
If there’s one takeaway I want you to remember from this post today, it’s this:
Your paycheck may actually be far from steady, but by leveling out the playing field, we can find a little bit more security in our income.
On a scrap piece of paper, or in the income portion of your budget sheet, write down one of the lowest paychecks you’ve ever received in one month. This amount is now your starting point, and its responsibility is to cover all your monthly expenses and budget categories.
If for some reason it doesn’t quite meet your needs, either rework the numbers of all your expenses to come in under that monthly income amount, or use the top-down priority method we talked about in the first step. This will take a lot of sacrifice on your end, but you will be so much better off if you can squeeze yourself into a lower income bracket to start.
3. Open Up a Separate Checking Account
Having two separate accounts can really help you stick to the steady paycheck mentality mentioned above, and it will also be less tempting to access on a day-to-day basis. Choose one account to be your direct deposit account, and the other to be your personal account.
Any time you receive a paycheck, run it through the one account first, then withdraw your predetermined paycheck to use for all your monthly expenses, and deposit that amount into your personal account. Remember, this should be the same amount every week, 2 weeks, or month, depending on how often you decide to budget.
When you do end up with a higher than normal paycheck, let the savings in that account build so you can supplement your income during the tougher times … a.k.a. months with lower paychecks, or going weeks without any at all.
Even though budgeting on an irregular income is slightly more involved as opposed to working with a bi-weekly paycheck, it’s totally doable. Once these methods become habit, you will be able to cover all your bills every month without any problems.
I like to think of it as taking a proactive approach to your paycheck, rather than a reactive one. You can’t let the fear of not being able to create a perfect budget keep you from making a plan — it’s even more essential now than ever that you try and make it work!
That third option works wonderfully for us! Between my husband being self-employed, and having to balance fewer work hours during the school year with lots during the summer, we’ve had all variations of irregular income. We’ve found it works well to put most into savings, so it can at least accrue a bit of interest, and only keep in the checking acct whatever our bare minimum is. Our annual income is still super low, but we’ve managed to save quite a bit that way!
That’s awesome! We don’t like keeping more than we have to in the checking account either – it’s too tempting to spend it! 🙂
The problem is you’re still talking “paycheck”. We don’t receive a paycheck. Managing a small business is all about cash flow and being a sole proprietor means business and personal finances all mesh together. We pay the bills as the payments come in from customers. No one who knows about cash flow would be able to do this.
Jebany,
Thank you very much for your input! This blog is a small business as well so I understand your concerns. And though I can’t speak to your specific situation since I don’t know every detail, I do encourage anyone with a small business to not allow their business and personal expenses to “mesh.” If you keep them separate you will also have a much easier time when it comes to taxes.
If you are making personal purchases out of a business account it will also make it very difficult to keep track of your actual business income, profit and loss. Small business owners can, and should, give themselves a paycheck. It should be recorded in the books as a personal draw unless you are to the point where you are taking several thousand out per year. You will want to consult a tax professional for more specifics on when you change from a personal draw to an actual paycheck – there are different tax implications with each type of withdraw.
These withdraws or paychecks may not be for the same amount every month and some months you may not be able to withdraw anything, but that is when you put the principles in the post in place. I highly encourage you to find a way to follow a budget and make it work for your situation!
I totally agree with Jebany..
Ya sorry, it doesn’t work quite that way. Maybe you should change your post to “How to Budget on an Irregular Paycheck”. Then your ideas sound quite lovely.
Thank you. I have asked for years how to manage my variable income all my life you are genius!!! Starting tomorrow.
Awesome! I’m so glad this helped you!
I work on commission, so these ideas work for me. Thanks for the post, I’ve enjoyed this series!
I wait tables – super irregular – and I just try to budget for the least amount of money I expect to get. Anything over that I alternate putting into savings, paying down debt further, and every once-in-a-while a treat. It works pretty well for me. I’m pretty frugal, though.
Kalyn thank you for the great info. I gleaned a lot from it and look forward to using them. I also appreciate your very professional response to others “questioning” your methods. I enjoyed reading this post and all the responses. Thank you!
You’re welcome! I’m so glad it has helped you!
Fantastic article. We always lead with priorities and work our way top down.
Thanks so much for your post. My husband and I both started small businesses this year. We have been doing the cash-flow “mesh” thing and it’s just not working for us. I appreciate your insight and plan to start implementing your ideas today.
For the record, my husband recently changed his business from a DBA to an LLC, “meshing” should definitely not be done once you’ve got a business account with it’s own tax identity.
What’s that old adage? “If you fail to plan then you plan to fail.” I totally agree. 🙂
We don’t yet have our own business, but plan to open it this year, so I have been researching budgeting in this area (with irregular income). One tip that I read that sounds like a really good idea is to live off of last month’s income. You save up enough were you get to the point that you are actually spending last month’s income while you are earning this month’s income (you will use this month’s income to budget and live off of next month). That way you always know what you are working with and do not need to guess or hope that enough will come in to pay the bills on time.
Thank you for these tips! I do follow a budget already, but I’m about to start a new job we’re I’ll be getting irregular paychecks. After reading your post, I feel a lot better about managing my finances under these new circumstances. :]
Also, great info on keeping business and personal finances separate!
That’s awesome, Lisa! I’m so glad you’ve found this post helpful. Starting a new job {especially one with irregular income} is always scary and might take some time to adjust, but you can do it!
This is a great write up! I would like to say (and I’m sure you meant nothing by it) that it is not only the husband or man that does contracted work. I’ve been working in the television industry for 3 years as a freelancer and though my partner has the steady job, I’m still the one bringing in the bigger income.
The past year or two I’ve been using the top down method and it seems to work very well. My partner and I both have several bank accounts that we use to keep our incomes straight. For me I have a bill account, a spending account, a savings account, and a joint account with him. The bill account I use for my personal bills (loans, car payment, insurance, etc), the spending account I use for fun things like eating out, going to movies (my partner and I are not married, we’ve actually just moved in together, and we pay for ourselves on a lot of our dates), the savings account is for my personal money to save for when I’m not receiving a paycheck, and finally the joint account is for all bills that we pay together (rent, internet, gas, electric,groceries). What I usually do is figure up how much money I would need to survive in a month and while I’m employed, I try to save up that amount. Luckily, with my past jobs I’ve been able to receive unemployment benefits so I can factor that amount in as well.
Also an important thing to remember when doing contracted work (especially in the television or commercial industry) is don’t spend the money before you have it. Sometimes I’m lucky to get paid every week but other times clients don’t pay on time and they are weeks behind in paying me. I am CONSTANTLY reworking how much I’m putting back in my savings account, how much I put towards credit cards, and how much I can have for spending money each week. Actually right now I’m waiting on a check that’s going on 3 weeks behind. I don’t add that money into my budget until I KNOW exactly when I will receive it and sometimes that’s not until I see it in my bank account. It’s a crazy life, but I chose this work so I just roll with the punches.
Very true, Morgan. Thanks for mentioning that! And I love your suggestion to not spend the money before you get it. It can be so easy to see money “coming in”, and assume you’ll have enough for whatever you are buying, but it’s such a good idea to wait and make sure!
Hi, this information is all very helpful ~ I was just wondering if you had the whole ‘course’ together as a pdf?
Not yet, Karin. But I do have “Create a Budgeting Course” on my future project list!! If you want to be alerted to when it {or some of my other projects} comes out, subscribe to my e-mail list and you’ll be the first to know! 🙂
Kalyn,
I am a licensed cosmetologist going on 7 years. It all began in High school when I started taking the course at the young age of 15. Fast forward- there I was 18 finally licensed, in this highly competitive industry. I started my career in a fast paced, walk-ins only, pay by the hour, guaranteed pay kind of ‘salon’. Fast forward 5 years to present time. Clearly I got comfortable with the (very comfortable) guaranteed hourly paycheck coming in. Nowhere was it in my plan to stay there as long as I did. Now to my point, tomorrow is my first day in a “real salon”. No guaranteed $$$. My mind has been doing cart wheels on how to organize my finances. And reading this today was exactly what I needed to see. I feel so much better about everything. Thanks so much Kalyn.
With my artsy profession and my love of everything/anything arts and crafts/DIY related, I have started thinking about starting a blog. Do you have any articles or suggestions to lead me in the right direction for success?
Thanks!
Lacey
Hi Lacey! I’m so glad that you found this post and even more thrilled that it was so helpful. I do have a few posts about starting a blog:
How to Start a Money Making Blog
I hope that helps!