Budgeting in general is not really that complicated. At its most basic you simply list the at the top of the page how much income you have coming in for this month. Then you just start working your way down the page listing your expenses for the month. You are spending your income on paper, on purpose before the month begins.
The problem most often arises because we are not organized and we don’t really know what expenses we have or we don’t have a good handle on all the little day-to-day things that bleed away our money a few dollars at a time.
But there is another circumstance that makes budgeting difficult. How do you budget when you don’t know what that income number is that you need to write at the top of the page?
If you work a commission oriented job or are self-employed, for example, you might experience wide fluctuations in your income. One month you might make $10,000. But then the next 2 months you make almost $0. How do you budget when you have an irregular income?
Budgeting is actually even more critical if you have an irregular income because you can have such wide swings. Without a good budget you may find yourself eating filet mignon one month and Alpo the next. That’s a bad plan.
So how do you do it?
Prioritize your expenses
The first key is to prioritize all of your expenses. Simply list all of your expenses you anticipate in the coming month on a piece of paper Now consider which expense is the most important. Place a 1 beside that. Now what is the second most important? Place a 2 beside that.
Dave Ramsey promotes a concept called the Four Walls that I think is very helpful in getting started with this.
Food should be #1 on your list.. I don’t mean eating out. I don’t mean steak and lobster. I mean simply how much do you need to spend each month to keep basic food on the table?
Basic utilities like electric, water and sewer, heating expenses, etc. are #2 on the list. Cable isn’t a necessity.
Mortgage or rent
#3 should be your mortgage or rent.
The fourth item on your list should be transportation. Making your car payment if you have one. Paying for gas and insurance.
When you have those 4 walls covered you can face most anything. There may be other items that slip into the mix from time to time. Medical expenses, clothing if it truly is a need and not a want, school expenses perhaps. But for the most part those should be the items at the top of your list.
Establish your baseline
First look at your list that you just made for this month. Determine what fixed costs you have that you must pay every month. Those four walls would be a start. Add any additional expenses you have that must be paid. (If you have prioritized your list right, those expenses should all be at the top.
Now add up those fixed costs. This is your baseline that you need to have just to scrape by for the month.
Do you have some amount of income that is consistent? Some jobs provide a base income level with commissions or incentives that are added to it. Or perhaps your spouse works and provides a steady income, but your income varies from month to month.
If that “consistent income” is enough to cover those baseline expenses, then you are in good shape.
In many cases though it is not, or worse you may work a job where months with a $0 income are a common occurrence. If this is true for you then savings are going to be the key to your ability to budget. (And avoid the Alpo diet!)
Save in the good months
The real key to surviving on an irregular income is savings. When you have a good month, that does not mean it is time to have a party! Live like it’s a not so good month. Pay your baseline expenses. Cover whatever additional expense that you need. But do your best to sock away as much of that surplus as you can.
If you can do this over a few months you can build up that savings account so that in the lean months where you don’t make enough to cover your expenses or worse don’t bring home anything you can use these reserves to even things out
Plan for irregular expenses
Non-monthly expenses can be a problem for any budget, but they can be especially problematic if you have an irregular income.
Bills like insurance, taxes, certain utilities or anything else that comes on a quarterly or semi-annual basis can really wreak havoc especially if they happen to hit in one of those bad months.
The key is to plan ahead. Create a separate savings account. Let’s say you get a $600 home insurance bill on an annual basis. Divide that total by 12 and you need to set aside $50 a month to cover that expense. Do that for each of those non-monthly bills and those irregular expenses will no longer be a problem.
Beef up the emergency fund
Lastly, if you have an irregular income your emergency fund becomes even more critical.
Consider how unpredictable you income is. Realistically what is your worst case scenario? If you worst case scenario is a month you are $1,000 short then maybe you aren’t quite so bad off. If your worst case scenario could be no income at all for 6 months, then your emergency fund may be critical.
Most financial experts suggest having 3-6 months of expenses in your emergency fund. If you have an irregular income you should definitely err on the cautious side and be closer to 6 months. In fact, depending on how volatile your income is it might be wise to have 9 months or even a year’s expenses saved away.
Budgets are even more critical if you have an irregular income
A budget and careful planning is the key to surviving on an irregular income. Building up both a savings account to even out the bad months as well as an extra robust emergency fund will enable you to weather those months when there is little or no income.
I understand that if you are just getting started this may take a few months to get going. The important thing at least until you get things rolling is to live as frugally as possible when you have a good month. Save as much as you can and do whatever you can to reduce those fixed monthly expenses.
Irregular incomes can actually be a blessing. Commission-oriented jobs or self-employment often offers the opportunity to make considerably more money than a basic salaried job. Follow these tips and you can soon enjoy the mountains and survive the valleys these types of income provide.
What tips do you have for managing an irregular income?
Photo credit: renaissancechambara (creative commons)