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There are so many budgeting techniques out there, but they won’t work for everyone. In fact, for the folks like me who live on an irregular income, budgeting is a huge challenge.
How can you budget if you don’t have a predictable, salaried income?
I know the struggle all too well. Fresh out of college, I worked an hourly secretary job that was always cutting my hours. I never knew how much I would take home each payday, which caused a lot of stress.
Today, as a freelancer and business owner, I still don’t know how much I’ll bring home every month, which leads to a lot of financial uncertainty.
Irregular income means you have a smaller margin for error. Don’t get slapped with fines, fees, or late notices. Fortunately, you can still budget with sporadic paychecks.
You just have to adjust your money management practices to fit with your unique circumstances. Follow these 4 tips to master your finances on an unpredictable income.
1. Look at Trends
As a wage worker, some months I would take home $700, while other months I earned $1,200. My earnings were all over the place.
That’s why it’s so important to look at your earning trends before you create a budget. Go through your pay stubs from the last 1-2 years. Find your lowest-paying month and build a budget around that.
The idea is that you want to earn enough money to cover your baseline expenses, and budgeting for your worst-case-scenario will help you keep the bills paid.
Pay close attention to seasonality. For example, I used to bring home a lot more money in December because of employee bonuses, while January was always a lean month.
If you notice a lean month is coming up, you can save money ahead of time, preventing a lot of financial distress. But you’ll never know unless you look at your trends first, so always look at your historical earnings!
2. Stick to a Percentage-based Budget
Once you understand your historical earnings, you should have a firm grasp of your good months, bad months, and your average earnings.
Now you’ll need to create a budget. If you don’t have one already, create a budget in Excel or use a budgeting app.
The best approach to budgeting on an irregular income is dropping your expenses into percentage categories. Depending on your situation, that might look like:
- Rent – 35%
- Food – 10%
- Savings – 20%
- Utilities – 10%
- Insurance – 10%
- Transportation – 10%
- Entertainment – 5%
Budgeting based on percentages instead of dollar amounts is better for irregular incomes. Instead of a fixed dollar amount every month, you place your earnings into specific buckets to cover expenses based on percentages.
The problem is that you’ll always have a different amount of money in each category every month. This means you have a fixed amount of money to get you through the month (and that amount is always changing).
For variable expenses like food, that meant I had to use an envelope system to carefully budget my grocery trips.
But I know that some months you might need more money in one budget category than in others. For example, one November I needed to increase my normal food budget to accommodate Thanksgiving guests.
If you’re in that boat, don’t be afraid to prioritize certain expenses. While you’ve got to pay some things like rent, you might be able to squeak by with limiting your purchases elsewhere, like at the grocery store or gas station.
Even cutting back on a subscription or two for the month will save you a few bucks, which can add up to major savings if your budget is typically pretty slim.
3. Create a Financial Buffer
The best thing I ever did for my financial health was saving $600 as a wage worker. I once went 3 weeks without a paycheck and that financial buffer helped me cover rent.
When you’re living on an irregular paycheck, you need some kind of financial buffer to protect you during the months you earn less or in the event of an unexpected bill.
The cool thing about irregular earnings is that, some months, you’re going to earn more than usual. But instead of using those extra funds to live large, bank them.
Create a savings account to build up your funds when times are good. While you should try to put 20% of your earnings into savings, during these high-earning months, you might want to sock away more than usual.
Ideally, you want several thousand dollars in the bank to cover yourself, but any amount helps. Just $600 made the difference for me. Don’t overlook the power of savings.
4. Live on Last Month’s Income
This is something I’ve done for the past year and I’ve had a lot of success with it.
Instead of trying to live on whatever you earn this month, live on what you earned last month. For example, I use my earnings from January to pay for my February bills.
This method works because you already know what you earned last month. Instead of trying to guess what you’ll make, you can budget for next month with a set number in mind already.
Although this method takes a lot of stress out of budgeting, it took some work to get my bills and paydays on this cycle. But if you need more reliable numbers, living on last month’s income can be a good option.
The Bottom Line
There isn’t such a thing as a perfect way to budget, but that doesn’t mean budgeting isn’t worth it. As an hourly and gig worker myself, I know how powerful it is to get a grasp of your finances.
Empower yourself by looking at trends, budgeting based on percentages, creating a buffer, and trying to live on last month’s income.
If things aren’t working out, don’t be afraid to adjust as you go. Create a budget that works for you. Fluctuating income is hard to deal with, but budgeting gives you more control over the situation.
Follow these 4 tips to master your money goals and finally become financially secure on an irregular income.