How to budget when you have an irregular income.
Have you been trying to budget with an inconsistent income and keep falling short? Do not worry! You are not alone! This is a very common problem that people with irregular incomes experience. When incomes changes from month to month it can be very hard to know how to budget. I mean, if you don’t know how much money you’ll be earning each month, how do you decide how much to spend? I get it, and I am here to help! There are a few tricks you can use to make budgeting with an irregular income not only easier, but possible. Today I’m excited to share my tips to help you learn how to budget with an inconsistent income.
First Things First
Before we get ahead of ourselves, let’s first do a quick run through and how to make a budget. When it comes to budgeting, I recommend making a zero based budget.
Zero based budgeting is really just a fancy term that means that when making your budget your expenses will equal your income. Every dollar you will be earning will have a job, a category it will be put in. This doesn’t mean you will be spending every dollar, just that you will find a category for every dollar in your budget.
This form of budgeting has helped my husband and I find so much financial success and limit our impulse spending. If it’s not in the budget, we can’t buy it!
If you are new to zero based budgeting, or budgeting in general, make sure to grab my free Budget Cheat Sheets below to help you get started!
How To Budget With An Inconsistent Income
There are a few different tricks you can do when learning how to budget with an inconsistent income. I suggest trying a few of these methods out until you find what works best for you and your income.
1. Make your budget based on your lowest expected income.
My first tip to budgeting with a variable income is to make your budget based off of your lowest expected income for that month. It’s always better to have to much money, instead of not enough, right? Right.
When you budget off of your lowest expected income you can be confident in knowing you have budgeted enough money for your monthly expenses. And, if your income ends up being higher, well, than that’s just icing on the cake!
To find your lowest expected income you will first need to review your income statements from the previous year. Compare each month until you find the lowest amount you earned last year.
Use that amount of money as your base income for your budget.
If throughout the month you earn more money than you your lowest expected, you can use that money to:
- Pay off debt
- Add to your Hills and Valley Fund (more about this below)
- Save for retirement
- Save for emergencies
- Add to a sinking fund
2. Budget off of the previous months income.
Instead of living off of the amount of money you will be earning this month, live off of your income from the previous month.
Let’s say that you earn $5,000 in January, $3,200 in February, and $5,500 in March.
In February you will not budget or spend any of the $3,200 you will be earning. Instead, you will be budgeting and spending the $5,000 you earned in January, and set aside your February earnings. Then in March you will budget the $3,200 from February and save your March earnings until the next month.
Budgeting off of the previous months income can take some practice and self control, but it is a great way to ensure you have the money before you budget for the month.
If you find yourself constantly tempted to spend your monthly income, instead of the previous months, you might want to set up a separate bank account to store that money in until it’s time to use it.
- Related: How to Start Budgeting for Beginners
3. Create a Hill and Valley Fund.
A Hill and Valley Fund is one of the most effective ways to budget with an inconsistent income.
The Hill and Valley Fund is based off of the “Hills” and “Valleys” many people with irregular incomes experience. Some months your income will be big, like a Hill; and other months it might be a lot smaller, like a Valley.
Creating a Hill and Valley Fund is a way for you to help even out these variable income months. A Hill and Valley Fund is similar to a sinking fund.
*A sinking fund is a fund you save into regularly, but only use when needed.
The best way to grow this fund is to save some of your excess money during a “Hill” month into this fund, which isn’t always easy, but so important. Then, on the months when your income is low, a “Valley” month, you can use some of the money you have saved.
You can track your Hill and Valley Fund, similar to a sinking fund, within your budgeting programs. Or, set up a separate banking account to keep this savings in. Whichever works best for you!
It can be stressful when trying to learn how to budget with an inconsistent income. One of the most important things to remember is to not let that stress deter you from budgeting. Keep working your budget, trying different methods, and using your Hill and Valley fund and you will see success.
Try these three steps when making your next budget, and remember to stay consistent. Consistency is key to living within a budget, no matter how much money you earn. You can do it! I believe in you!