A while back I wrote a pretty thorough article on how to make a budget, but it didn’t really answer the question of how to set up a budget when you don’t have a regular paycheck. Interestingly, I seem to get this question a lot.
The fact is, it is more difficult to set up a budget when you never know how much you are going to make each month – but it still can (and in my opinion) should definitely be done.
Budgeting Tips for the Commissioned-Only or Self-Employed
In the good times money management is important because you can easily let down your guard and spend more then you realize. The optimist in you can mistakenly believe that it will always be like this from now on, only to find out a few years later that things can change suddenly without notice.
The wise see trouble coming from far off and make plans. On the other hand, when times are tough you need to manage your money well. Sometimes, things can get so tight financially that we really do not want to face how bad things really are. So, we just continue down the road making things worse financially.
I happen to think it is far more important for those with irregular income to set up a budget because of the quick damage that can be caused if you don’t.
I have heard stories from readers who really got themselves into a mess by having a few prosperous months and assuming that it would just stay that way. Then when things go back to “normal” they can’t adjust back to those “normal” spending levels.
How to set up a budget with irregular income
1. Get the average of your last 12 months’ earnings
Add them up either in a spreadsheet or piece of paper. Once added, divide the total by 12 to get your average monthly earnings for the year. (If you have 24 months of data, you may consider using that)
This is the figure that if everything stays the same the next 12 months, you should be able to use to set up your budget. But, as we all know, things rarely stay the same and even if they did, you could have a few of the low months in a row that could make things quite challenging.
2. Multiply by 0.8 (or less)
So, for added protection and safety, I like to multiply the average monthly earnings by 0.8 (or less for more safety). As you can see in the example to the right, this would give you $772 as your number that you base your budget off of.
If after tweaking your budget and cutting your expenses like crazy, you still can’t live off of that amount, then you can multiply it by 0.9, but the higher you go, the higher the chance of things not working out.
3. Open a buffer savings account
This is an account that is going to function a little like an emergency fund, but it’s sole purpose is to store up the surplus earnings on good months, so that you can pay the bills on the bad months.
It can be a savings account or money market account, but it should be money that you can easily access and ideally it would be at the same bank you have your checking account – so you can make quick transfers between the accounts.
4. Try it out
Using our example above, we are going to live off of $772 each month. So assuming January is the same, we would have a $78 surplus ($850-$772) which we would then transfer to our surplus account. In February we would have a $428 surplus and in March a $278 surplus – which would give us $748 in our surplus account.
Then when April & May come around we would be able to handle those deficits ($374) just by pulling the funds from our surplus account.
The challenge
The hardest part of all this is being disciplined enough to sock the money into the surplus account and not using it to buy a new entertainment center. It is so easy to think that after a couple good months, it will always stay that way. But, as they say, the best time to put a new roof on your house is when it is sunny. It is a lot easier filling an account up with money after a good month, than after a bad month.
The flaw
And the truth is, while I think this is the best way to try to budget when you don’t have a regular paycheck, it is far from perfect. I mean in reality it is very unlikely that your earnings are going to be EXACTLY the same as they were 12 months ago. Sometimes things trend upwards or downwards over years. But, even though it isn’t perfect this is the best way that I know how to budget in situations like this.
This is just part of the price we pay for being self-employed, in sales, etc. Sometimes we make more, sometimes less, but personally I would choose the challenge of handling irregular income over a steady paycheck any day. It was easier budgeting with a regular paycheck, but I generally only got to see my income increase once a year by 5% (and then saw it go down by 100% when I got laid off).
I like living on the edge a little more – don’t you?
More on setting up the budget
Since I wrote such a thorough article about creating and setting up a budget – you can just check that out for more detail. It will show you how to set up the budget after you figured out your income – which I guess what this article is really about.
I used a paper budget (like I mention in that article) for a while, but am now using YNAB (a budgeting software program) and I am really enjoying it. So if you are willing to pay for a budgeting tool, it might be worth checking out.
A few more tips to help you budget with inconsistent income
Don’t spend it all when you get it.
I know that this should go without saying, but something happens mentally when you have a few thousand extra dollars in the bank. I know some of you are wishing for that problem to come into your life. I believe that time and chance happens to us all so you still need to be prepared now. Once money stats to come in, you can develop a false sense of security and can easily let your guard down.
The book of Proverbs (22:3 NIV) tells us that, “The prudent see danger and take refuge, but the simple keep going and pay the penalty.” Do not foolishly let your guard down when times are good. Decide now that you are going to be smart with surplus.
Use cash for anything that is not a bill.
After you have your necessities budget set up, determine a reasonable monthly amount for anything that is not directly related to a bill. Get that amount out from the bank either weekly or monthly.
This will help you in many ways. It creates discipline because once the money runs out you have to wait until your next cash withdrawal. It also keeps you better organized as you will not be pulling your hair out with all of the small charges on your bank statement.
Rank your expenses in order of importance.
If money becomes extremely tight, then take out a piece of paper and rank all of your expenses in order of importance. This is a great exercise to do for many reasons. It helps you to know who to pay first when some money does come in the door. Try your best not to have automatic withdrawals in your account. While it might appear simpler, you have less control. Also, take a look at the very bottom of the list. Maybe the last five items on your list you could be cut out altogether as they are not as important to you to begin with.
Apply some of these principles today and you will have a better piece of mind even with an irregular income.
A few other tools to help you:
- 10 Free budgeting spreadsheets
- 70+ budgeting categories to start your budget
- 7 free printable budgeting worksheets
If you have any other helpful ideas for budgeting with inconsistent income, let us know in the comments below!
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Excellent article! I think this should be required reading for anyone with fluctuating income. I love steps 2 & 3 the most. When I’ve been in this situation before (especially as a musician), I just used the average; but reducing the average and then saving the excess is such a wonderful idea. Like you said, it just takes discipline!
Thanks!
I use this strategy for my budgeting, even though I’m not self-employed. As college students, my wife and I both work part-time jobs. Since we don’t work a set number of hours each week, our paycheck changes. To further complicate it, we have trips with school and church that cut into our work times. So, we have found our minimum living costs by averaging them across about 24 months, and use that to base our budget off of.
It’s worked fine for us so far, and this article outlines the necessary steps quite clearly!
I teach the same concept.
You mention a bit of the reality of this budget. …”in reality it is very unlikely that your earnings are going to be EXACTLY the same as they were 12 months ago. Sometimes things trend upwards or downwards over years.”
I teach to play it safe with the 80% rule as well, but the people I help tend to increase their earnings over the years. Their SURPLUS fund tends to grow and grow. I always recommend to them to put a cap (limit) on that fund and have rules in place to do something with that excess at the end of each month.
Good morning, again, Bob!
And, again, God bless you and those you love. I am off to do my budget based off the guidance in this and the how to make a budget article I just read. You, my friend, are a blessing, in-deed. I’ll write here with my successes, challenges, and whatever else.
In joy,
Nicole
I’m not a church going guy, but I really enjoy everything you do on this blog.
Used to be a variable income guy, and never really able to get a handle on
how to make ends meet much of that time. This info above couldn’t much simpler to absorb and use, looks like to me.
I’m presently trying to make income from the net, so your articles on beginning blogging are very easy to get into mind, unlike many other advise to newbie articles. Keep up the good work.
God Bless Your Efforts.
Willy
We have this problem. My income is set, my wife’s income is not. She is a free-lance interpreter for the deaf. So if she works, she gets paid; if she does not, then no money – no vacation time. If she takes a week off for vacation – NO INCOME!
We managed to get a month ahead on our budget – very hard to do – we were VERY blessed on month.
Now all of THIS month’s income goes into savings. When we do our monthly budget, we can ONLY spend what we made the PREVIOUS month. We adjust the budget accordingly (most of our budget ideas started with a Dave Ramsey course). We do cash-envelope system. So we pay all our bills on the first of the month. Pull the money needed to cover the budget over from savings to checking – just want we made the previous month.
At the top of our budget for the month we list the income and the date – the date is always last months date on each income entry.
So far it has worked. We save for the buffer each month. We also save for 3-6 month reserve/emergency.
This also helps so your are not waiting on a particular check to pay something due mid-month. All the money is already there. No sweat! Well, maybe a little sweat 🙂 BUT, so refreshing to know we are covered.
I can give more details if it would help someone.
Hope this helps.
Thanks Lori!
Great advise! Just what I was looking for! Thanks! Now if I can just convince my husband to try this and for us not to spend on something we don’t need. That would be a blog in itself. lol
Bob, this is is an interesting twist on the irregular income method of budgeting. It’s very practical and makes a lot of sense. It definitely takes a lot of discipline though. Not sure if we met or not, but I remember seeing you at FinCon13. A great time!
Yeah. I was reading this & thinking, “YNAB would solve this problem.” Then I got to the end…YNAB.
Seriously, I am on salary, about as steady as it gets, and my income varied by about 20% month to month for one reason or another last year. But with YNAB, I only make a plan/budget for money I have now, not what I expect to get. So I can save for the lean months, as well as those ‘lumpy’ bills like car insurance twice a year.
I totally agree with you that basing your ‘estimated’ budget on a lean month is wise. But with YNAB, you know exactly how much you have RIGHT NOW that is allocated to groceries or car repair. It’s amazing.
I think there are other options…look for ‘zero sum’ budgeting. GoodBudget may be similar.
I love the idea of opening up another account for surplus. I think discipline and self-control are key traits to have if you’re on an irregular income. I used to be on an irregular income during uni with my casual job, and even though I knew my shifts a month in advance, they could still be cut at any time. This budgeting method definitely would have been helpful back then!
Amanda
Thanks for the comment, Amanda!
Setting up the surplus account is so brilliant, thanks so much for the idea!
This post is old, but I just came across it about a month ago, thank God! There seems to not be very much great advice out there on budgeting with an inconsistent income. As a result, we were following budgeting advice for people with regular paychecks (3-6 months of emergency fund… but no variable income account)… no variable income fund. We hit some scary points last year and decided things need to change. We’ve been working hard on saving and now have 6 months emergency fund plus a variable income account to draw from and put money back in. Also, we will continue to live off of 80%. My question for you is what do you intend to do with the remaining 20%? Does it go completely into variable income until it is an amount we are comfortable with… (and how do we know when enough is enough?) and/or then save + invest??? Agree living off of an inconsistent income is scary but well worth it.