How do you budget with an irregular income?
Last week, a number of you mentioned a major difficulty in setting up monthly household budgets: irregular incomes. What do you do when you’re self-employed and have a fluctuating income? What if you’re paid on commission? Or what if your income simply varies depending on the time of year?
I don’t pretend to think this is easy, but there are some solutions for you. I’d recommend trying them before brushing off budgeting all together. They may not be pure zero-based budgets, but pulling some ideas from these methods could morph into a custom zero-based hybrid budget for your family.
The “Live This Month on Last Month’s Money” Idea
Like Maureen suggested, you can employ the method of paying your current month’s expenses with last month’s income. In other words, you’d pay for the July phone bill with June’s paycheck. If you have an irregular income, this would give you a month’s leeway, and you could either find ways to supplement an upcoming month when finances are tight, or you could plan on simply living frugally for a month.
The obvious question to this, then, is how do you start? Because in that first month of trying this plan, you’ve got to have some money from somewhere. I know it can work, but I think you have to slowly work up to this system, saving a little each month until you have a month’s worth of expenses in savings ready for you.
The “60% Solution”
- 60% to committed expenses – everything from regular bills to clothing to giving.
- 10% to retirement
- 10% to irregular expenses – vacations, major purchases, and the like.
- 10% to long-term savings or debt – either one, depending on your situation.
- 10% towards fun – entertainment, hobbies, etc.
I suppose this could work for some people, but I don’t feel I can completely endorse this idea because of my firm conviction on being debt-free. If you’re in debt, I advocate doing everything you can to become debt-free, even if that means putting 50% of your income towards knocking it out (for a short time). But if you are debt-free, this budgeting idea could reasonably work for you.
If we had an irregular income, however, this is how I would budget.
The “How I Would Budget if I Had an Irregular Income” idea
• Category 1. Instead of starting with our income, like you do in a zero-based budget, I’d first list out our predictable, committed monthly expenses. This is stuff like rent, utilities, and groceries. This is not stuff like dining out, entertainment, or vacation. Ask yourself, what do you absolutely have to pay for in order to survive? Those are the items to list here.
• Category 2. I’d then list out our more irregular annual expenses (such as Christmas, or sometimes auto insurance), divide them by 12, and use that number as our monthly expense for that category.
• Category 3. Then, I’d list our monthly “fun” expenses, like dining out, hobbies, or entertainment, and decide how much we want to spend on this month.
• Category 4. Finally, I’d list our nice-but-unnecessary expenses (like if we’re saving for a new couch), add up the total amount we want saved, and divide by 12.
Category 1 is our necessary expenses, and that total amount should go into everyday our checking account. Categories 2, 3, and 4 would then fall into separate checking or savings accounts, dog-eared for their specific purpose (sinking funds, in other words).
Our goal would be to fully fund Category 1 each month. After that, with this plan, you decide based on your situation which other categories fall in order of importance. So if it were us, I’d then fund Category 2, then 3, and finally 4.
This is when the beautiful magic of Capital One 360 accounts come into play – you can have an unlimited amount of accounts, label them for their specific purpose, and have money automatically drafted into each account.
I’ll play this out with our token family. The McSimples made $3,000 in June, but only $2,300 in July.
The McSimple’s Typical Monthly Expenses:
- C1 – giving: $100
- C1 – rent: $1,000
- C1 – utilities: $300
- C1 – groceries: $500
- C1 – gas: $100
- C1 – other monthly bills: $200
- C2 – auto insurance: $50
- C2 – Christmas: $50
- C2 – gifts: $100
- C3 – entertainment: $200
- C3 – stamp collecting: $100
- C4 – vacation: $200
- C4 – saving for a new couch: $100
TOTAL = $3,000
For June, The McSimples could fully fund all four categories, but in July, they could only fund Category 1 and part of Category 2. Though not ideal, it’s okay, because Category 1 is what they need for survival.
This idea works well following the Baby Steps. For example, if you were on Baby Step 2 and working on becoming debt-free, anything but C1 and C2 would go to the Debt Snowball. If you’re working on fully-funding your savings with 3-6 months of expenses, as in Baby Step 3, then I’d say anything past C3 goes into your Emergency Fund.
For more reading on how to handle irregular paychecks, My Dollar Plan has some good ideas.
Now I’m not a financial expert. Does anyone else have ideas? Have you had personal success budgeting on an irregular income? Let’s give those Simple Mom readers with unpredictable incomes some ideas! I’m convinced that everyone is able to responsibly steward all the money that comes their way, no matter how often it’s given to them.
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