budgeting on an irregular income

April 2nd, 2008

Budgeting on An Irregular Income

At different points in our “coupled” lives, my spouse and I have had semi-irregular income. When we were first married, I worked at a job with unpredictable bouts of overtime, and my spouse’s job had profit sharing as part of its salary structure, so our income was very variable from month to month. Now, my spouse’s salary is very regular, but my income is completely variable. Because my spouse’s salary at this point eclipses my earnings, I consider our income fairly regular, but budgeting, even zero-dollar budgeting, can be done even on the most irregular of incomes.

When looking at how to budget when your income from month to month is in flux, one of the big keys is to try and even out the hills and valleys as much as possible through a savings plan. To do this, you need to save a portion of what you earn in good months and use that to help smooth out the tougher months. It is a simple concept, but hard to do without serious discipline. It is easy to justify spending a little more in “good” months, but the key to making irregular income budgeting work is to treat good months and bad months the same from a budget perspective.

How do you know what to save, and what qualifies as a good month? If you have had an irregular income for three or more months, the easiest way to do this is to come up with your average earnings over an at least 3 month if not a year period. The longer the better. You can then base your budget off that number. Let’s say the number is $2500 per month. When you make $2700, you bank $200 of that. When you make $2300, you pull $200 out of that savings to make up the difference. This should be a totally separate account from your emergency savings account or any other savings goals. This is the budget savings account and will make your irregular income life simpler to manage.

If you have no idea what you will earn month to month, you’ll have to be more conservative and creative at first. Determine your very baseline expenses. This is the amount you absolutely need to make, and this will form the beginning of your budget. What you make over that, bank. After a few months go by, you can look at if you end up with a surplus each month, and make some upward adjustments in your budget to create yourself some wiggle room. Go slowly, and be careful. The more data you have, the more sure you can be that you have the room to wiggle.

What happens if you do better than history dictates for an extended period of time once you’ve “regularized” your income? You can use that savings surplus towards another financial goal, or make some upwards adjustments in your budget. I recommend some additional retirement savings, myself, as long as you are out of debt.

Basically, the key to budgeting with irregular income? Make it mimic regular income as much as possible. Predictability is the key to the zero-dollar budget. If you know how many dollars you have, you can assign every dollar a job, and make them work as hard for you as you worked to get them.

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22 Responses to “Budgeting on An Irregular Income”

  1. My husband has a steady income and mine is irregular. I think the advice that you suggest about making sure you have a good savings plan is very good. It is extremely wise to keep tucking money away just in case your earnings reduce or you have some unexpected expenses.

  2. Thanks for the reminder! I am facing just such a situation in May. I will not have as many projects in my contract work, so I need to allocate some of my April earnings for May. I also am beginning to earn a very small amount from one of my hobbies and I have chosen to use that as my “pocket money”.

  3. My family has not had a regular paycheck for over 7 years. I am paid 100% commission, and I really never know when I am going to get paid again. I have learned the hard way but the only way we can make it is too:

    Have no debt
    try to live three months in the future, meaning have your mortgage or rent paid three months in advanced.
    Also do not spend..save as much as possible.

    I know this is what everybody should try to live by. However in my world I can make 20k in a month and nothing for 3 months, or 4k a month for several months then nothing for several months. There is just no telling.

  4. Although our income is pretty steady now, that was not the case in the first couple years of self-employment. Our approach was to spend as little as possible every month, and try to save the “extra” income we got in good months to pad out the lean months. We were very much living paycheck to paycheck, but over time we saw it get better little by little. Paying off all our debt was a huge help, since without debt a low income month isn’t as painful as it used to be.

  5. Since people’s savings rates tend to be woefully inadequate, perhaps there is another perspective. Major future financial goals require substantial asset buffers. Future goals could include children’s education, retirement, involuntary unemployment, disability, etc. Savings rates in the 10% to 20% range are usually required.

    From the asset accumulation perspective, perhaps having steady versus fluctuating income month to month does not matter that much. The question is how much of income are you saving, after the fluctuations have been smoothed out?

    Fluctuating income creates additional challenges, if you have not decided beforehand what to do with it. For example, even if someone might have a steady paycheck and can plan one’s expenses relative to that steady income, what do they do with bonuses, for example? When bonus income arrives, what it the predetermined policy? a) 100% invested? b) 80% invested / 20% discretionary spending? or c) Woo Hoo, Vegas here we come! Deciding to do a) or b) leads to substantial asset buffers over time. With c? Well, Woo Hoo for now.

  6. I really like that idea about picking a month to month average and banking the extra, then taking that extra when you hit below average! I’ve always wondered how people with varying income do it. Though I agree it probably takes a few months to figure out what number works best. Thanks for the great advice.

  7. This is great advice – my husband works as a personal trainer and his paycheck always varies depending upon how many clients he sees in a given two week period, how many he picks up, and how many finish their training. I have a (somewhat) steady paycheck and I’ve got to get better at putting some of it away though it’s really difficult when we keep getting surprised with things (car repairs, special prescriptions for our kids allergies, etc.).

    I’m definitely going to take this post to heart and try and commit to saving something, so that when those things come up, I don’t panic every time.

    Thanks!

  8. I’ve often said that one benefit of being self-employed (or highly commission based) is that you won’t be living paycheck-to-paycheck–there aren’t any paychecks. Obviously, the flip side of this is that you need to be extra responsible with your funds, when you have them.

    Your advice to make irregular income seem regular is appropriate. The key to making that work: you must be conservative (meaning very realistic) as to what that three month average really is. If you fudge it, you’re not tricking anybody and this system breaks down. Fast.

    No one ever gets in trouble because they saved too much.

  9. Steve in W MA Says:

    March 29th, 2010 at 1:19 pm

    One very effective method for managing irregular income is to deposit all your income into an income holding account, then every month transfer a monthly allowance based on your average monthly needs to your regular checking account for the month’s budget.

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