Understanding exactly how to budget can be difficult, even for someone with a consistent income. But, think about how complicated budgeting would be if you had an irregular income.
This is what millions of Americans deal with all the time.
Freelancers, small business owners, and salespeople all have incomes that can change from month to month. Sometimes the fluctuation can be drastic, and it can make it hard to save money.
If you find yourself in this situation, how can you develop a budget when you don’t know what your income is? Keep reading as we walk you through five steps to budget on an irregular income.
1. Calculate your bare-bones budget
The very first thing you need to do is calculate your bare-bones budget. These are the essential expenses that you need to cover each month. Make sure to include categories like housing (rent or mortgage), utilities, groceries, insurance, transportation (car payments, public transportation), and other essential costs.
Housing, insurance and car payments can be easy to factor in as the monthly amounts stay about the same. However, your utilities and groceries can fluctuate. To get an accurate figure, calculate how much you’ve spent, on average, for each category during the past 12 months.
While these are the critical expenses you need to cover each month, you should also include retirement, savings and debt payments. While these are not required, they are still important.
2. Add in your discretionary expenses
Now that you’ve calculated the bare minimum you need to get by, it’s time to calculate your discretionary expenses. These are things that you spend money on but can live without.
These expenses include going out to dinner, a date night at the movies, the cost of your daughter’s dance class, etc. Figure out how much you spend on these expenses, on average, each month.
Looking back through bank or credit card statements is a great way to locate these expenses. Budgeting apps link Mint also do a good job of breaking down your expenses into categories.
3. Build up an emergency fund
Many of you have probably heard of an emergency fund. Its sole purpose is to cover an unexpected expense. If your income is always changing, an emergency fund is a must. The last thing you need is to have an emergency pop up during a lower income month and not have anything saved.
Simon Moore, a contributor to Forbes, recommends three to six months worth of expenses in an emergency fund. David Bach, a personal finance expert, takes it a step further and recommends that you save one year’s worth of expenses.
To get started, consider opening a Chime bank account. Chime’s Automatic Savings program is a great way to build your emergency fund. Here’s how it works: Each time you use your Chime Visa® debit card, Chime will round up your purchase to the nearest dollar and transfer the difference to your savings account. Plus, Chime makes it simple to save each time you get paid. As a Chime member, you can automatically deposit 10% of your paycheck into your savings account.
4. Pay yourself a reasonable salary
Having an irregular income can be stressful. This is why a budget is so important. It helps you forecast your monthly expenses. It also gives you the ability to see how much you have in your bank account so that you can perhaps pay yourself a salary.
To start, try paying yourself based on your budget the previous month. You can do this by combining the totals from your bare-bones budget and discretionary expenses and depositing that in your checking account on the first of the month. This will cover the entire month worth of expenses. Everything else you might have made will be put toward either short- or long-term savings.
By doing this, you are never spending more money than you actually have. Instead, your income is based on the past.
5. Pay your bills using a zero-sum budget
If you’ve never heard of a zero-sum budget it’s a fairly simple budgeting method where every dollar has a purpose.
At the end of every month, your income minus your expenses should leave you with zero in your checking account. For example, if you have $200 left in your account at the end of the month, your job isn’t done. That $200 needs to be allocated to something. For example, perhaps it will go toward debt payments, retirement or short-term savings.
So, to pay your bills using a zero-sum budget, you need to start with your list of bare-bones budget items and discretionary expenses. Go down the list and pay each item, starting with the most important. Once all those are taken care of, see how much money is left over. Remember what we talked about – every dollar has a purpose. Look for a place to allocate the extra cash.
One important thing to note with a zero-sum budget is that you need to pay attention to your variable expenses throughout the month. Make sure you’re staying below the amount you budgeted for items like groceries, clothes and anything else that fluctuates.
Irregular income doesn’t need to complicate the budget
You can still budget – even with a fluctuating income.
As long as you stick to your budget and live on the income you generated from the previous month, you should begin to see your financial situation improving. Are you ready to give it a try?