How to budget with an irregular income

Many people have an irregular income for a variety of reasons. Self-employment, gig employment, or seasonal work can make for variable paychecks. Business owners and freelancers may also have paychecks that are steady but change in amount each pay period.

Remember, even if you can't predict your income precisely, having a budget will create a spending plan for your money that includes paying down debt and saving for a rainy day.

If you struggle with keeping a budget due to having an irregular income, there are some ways you can avoid the rollercoaster of ever-changing cash flow.

Create your budget

The first thing you'll need to do is create a budget that is unique to each month. Be as exact as possible. What does your spending look like around those increased expense months, like back-to-school time, the holidays, or one-off events like moving? Accounting for all of those things in a written spending plan will be a crucial first step.

Once you've got all your expenses in hand, add them up to get a total. Now that you see how much money you are spending each month, ideally you'll have enough income to cover all of your household expenses. If not, then it’s time to look to reduce your expenses.

Before you can create a budget on an irregular and fluctuating income, you have to start with the lowest month of income and your bare minimum monthly expenses. For most people, this budget includes needs and essentials – housing (rent or mortgage), utility bills, transportation, groceries, and childcare. Remember, some of these routine expenses can fluctuate - utility bills, gas for your commute, and groceries. After you document the essentials, don’t forget to include debt repayments for credit cards and loans, as well as saving for emergencies. These might not be essential for surviving, but they are essential for thriving! 

Forecast your income

The best case scenario is that your irregular income covers your baseline expenses, but this may not always be the case. To account for that, begin your budget using the lowest amount of money you make in a month. If your income doesn’t consistently cover your monthly bills, then you will want to use money from your higher-earning months to cover your lowest income periods. 

Save the extra

When you've got a budget surplus (a higher paycheck month):

• Open a separate savings account and regularly contribute to it, especially in months when your income will be higher than usual and outweigh your expenses.
• Create a small direct transfer from your current account into this savings account to add a boost to your savings habit. You can never have too much money available to cover you in the times where your income is lower.
• Have an emergency fund (in a separate savings account) that is for the sole purposes of covering emergencies and not regular, budgeted expenses. An emergency expense is one you could not foresee or budget for but you truly need. Medical expenses often fall into this category. 

If you already have some savings, you’re way ahead of the game. Keeping three to six months of expenses on hand can help you remain stress-free. The key to living stress-free on an irregular income is having ample savings. Tough months will come along, and when they do, your savings will fill in the income gaps.

Fix your cash flow

If you still experience months where you are stretched too thin money-wise, there are a few other things you can do to keep yourself afloat:

• Reduce expenses in some areas - perhaps entertainment, eating out, or expensive hobbies.
• Try and reduce credit card spending when you're able to foresee periods where your income might be a little lower than normal.
• If you do find yourself unexpectedly reliant on your credit card during lower-income months, try and use some of your emergency savings to meet the repayments, this should give you a little more wiggle room.
• Increase your income. Of course, this sounds easier than it really is, but it's not impossible. It could mean getting an additional part-time job or moonlighting in a job that could add extra money to your budget.

Live on last month’s income

Once you've created your budget and added up your unnecessary expenses, you’ll know exactly how much money you need to make it through the month without dipping into savings. So, on the first of the next month that comes along, deposit that amount of money into your regular checking account.

At the first of the month, you should theoretically have:

• the amount of money you need for bare-bones bills plus unnecessary spending in your checking account, and
• a zero-sum budget (spending plan) with your monthly expenses and bills listed.

Pay your monthly bills according to the plan you designed, and that includes "paying your savings" and any debt repayments. If you want a separate savings account for these long-term savings, now is an excellent time to open one. Or you can simply allocate cash back to your regular savings account each month and watch the money pile up.

Mark bills as paid and end with 'zero'

You need to keep track and monitor your spending throughout the month. To make it easy, consider paying bills twice a month. 

Don’t forget that you estimated some expenses like groceries or entertainment, so you need to make sure you don’t go over in those categories. By the end of the month, you should have all bills paid, and all your other expenses (groceries, gas for your car, etc.) bought and paid for, and you may have some money remaining. The idea is to get all of the categories down to zero each month. 

Dealing with the reality of irregular income doesn't have to be stressful if you have a proactive plan in place. Be sure to maintain a budget and update it as you learn of changes like an unexpected boost income or expenses. This way, you'll be in position to make progress with your other financial goals.