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!