If you have ever considered creating a budget, you know that one of the building blocks of a budget is knowing your income. So, what if your income is inconsistent? For the more than 21 million American workers with variable income, creating a budget can be confusing when it comes to figuring income. Individuals who work on commission, on a contract basis, or who are self-employed often experience sporadic fluctuations in their income, as opposed to the steady and consistent earnings for salaried workers.
Having irregular income does not limit you from being able to budget. Aside from exploring various debt relief options to help you pay down any bad debts that are holding you back, creating a budget that you can stick to is important to your financial health and can be instrumental in reaching financial goals.
Here are a few tricks to help you budget effectively despite having an inconsistent income.
1. Calculate Your Basic Budget
Knowing how much income you need is a good starting point. So, instead of starting with your income, work backward and start with your expenses. Begin your calculations with your non-discretionary expenses, or your non-negotiable necessities. This includes things like bills, debt payments, savings deposits, insurance, and investments. In calculating your expenses, be sure to account for how much money you need for groceries, gas, clothing, and other necessities you purchase every month.
While some of your expenses, like rent or mortgage, will be concrete, others may change from month-to-month. To account for fluctuating expenses, review those payments for several months and assume it will always be the highest number. This will provide you with a cushion to make sure you always budget to cover your total expenses, sparing you from coming up short. Calculating your total expenses tells you how much you need each month to satisfy your financial obligations. This is your bare-bones budget or the minimum amount of income you need for financial stability.
2. Make a Prioritized List for Your Discretionary Expenses
Your discretionary expenses are those non-essential purchases like streaming subscriptions, dinner out, and other entertainment expenses. You can live without these things, but when your budget permits, these are expenses you would like to afford. Prioritize these items in order of most important. In months where your budget has some wiggle room, you can purchase these items in order of importance.
3. Keep Emergency Fund Deposits a Priority
While technically, deposits to your emergency fund are considered a discretionary expense, treat your emergency fund as a non-negotiable. Your emergency fund is essential for keeping you out of debt and in overall good financial health. It is not only a resource for emergency expenses, but it is also a building block to financial freedom.
It can be easy to make excuses to avoid depositing money into your emergency savings account. The physical act of depositing money into the account when you have other things you would like to buy at the moment is hard. Set yourself up for success by skipping the step where the money is in your possession. Instead, make sure you never skip out on contributing to this account by enrolling in an automatic deposit program. This will keep your account growing without you having to think about it. And, chances are since you will not see the money in hand or your personal bank account, you probably will not even miss it – but you will be thankful it is in your emergency savings account when you need it.
4. Create a Back-up Account and keep it Separate from Your Emergency Fund
Sometimes called a Hill and Valley fund, individuals with fluctuating income would be wise to create a special account to create financial stability. The Hill and Valley fund is a safety net that individuals can contribute to when earnings are more than expected and withdraw from to cover expenses when earnings are less than expected. In times of financial hardship, the funds in this account are available to help bridge any gaps in income so the emergency fund does not have to be tapped into.
5. Consider a Zero-Sum Budget
Under this strategy, every dollar that comes in must go out. You are in control and you tell your money where to go. Your budget will always be balanced between income and expenses so that it zeroes out each month. In months where income is higher than expected, the leftover money must have a destination. This is a great opportunity to build up your emergency savings fund, pay off debt, or add more cushion to your back up account.
6. Finally, Determine Your Income and Complete Your Budget
Take inventory of one year of income. Calculate the average and compare the average of your monthly income to your lowest month of income. Whichever amount is lower is the number you should use as your income in calculating your budget. By doing this, you are automatically creating a safety need for yourself. Most months, your income will probably be higher than what you calculate in creating your budget. Deposit the extra money into your Hill and Valley account or use the leftover funds to make an extra payment towards your debt or add a little extra to your monthly deposit in your emergency savings account.
Budgeting is for everyone, but it is especially important for those with inconsistent income. A budget is a tool to help you figure out how much money you need and prioritize your expenses, so you always have enough money to meet your financial obligations. When you do not know when you will receive your next paycheck or how much money you will earn, finances can be scary. But, having a budget will provide the game plan and reassurance needed to have financial success.