One advantage of traditional work is that your income is usually consistent. Your paycheck follows a strict schedule, and you’ve probably memorized the net amount. You can budget for the year and know exactly when and how much cash will be in your account.

If you work on commission, work intermittently, or run a business, your income probably isn’t nearly as predictable. In fact, it can vary significantly from month to month, leaving you stuck in a feast or famine cycle that can make effective budgeting impossible.

If you’re having a hard time organizing your expenses because you have inconsistent or unreliable income, here’s what you need to know about budgeting with irregular income.

Why is it difficult to budget with an irregular income?

Before discussing the best way to budget irregular income, let’s clarify the key challenges to make sure we tackle them adequately.

Inability to base expenses on income

Many of the most popular budgeting methods divide your income into several buckets. For example, with the 50/30/20 budget, you spend 50% of your income on essential expenses, 30% on discretionary expenses, and 20% on savings.

These approaches are popular because we instinctively base our spending on our income. For example, when we first enter the job market, we generally make less money and have lower expectations of our lifestyle. We’re okay with living with a roommate, driving a used car, and taking a cheap vacation or two a year.

However, as we gain experience and earn more, we blow up our lifestyle. We want to buy a house, upgrade the car and travel to Italy instead of Florida. That’s why people live paycheck to paycheck, even if they’re making six figures.

Unfortunately, when your income is irregular, you cannot use it so easily to inform your budget. This can even lead to significant problems, usually in the form of overspending.

👉 For example, say you are a freelancer making $5,000 per month. You sign a contract with a new client and suddenly your income rises to $7,500 a month, so you finance a new car to celebrate. Three months later, one of your other clients decides to terminate their contract, bringing your income down to $6,000 a month. You’re stuck with the car payment and it takes a much higher proportion of your income than you’d like.

Lower Income Surviving Periods

When your monthly income fluctuates, there will always be times when you have to pay your bills on diminished income. If the fluctuations are big enough, you may even have to get by without income for extended periods of time.

Imagine you are a broker who lives entirely on commission. You only sell four or five houses a year, but each will set you back about $20,000.

Let’s say you sell your first home in January and your second in April. You should cover your financial obligations in February and March with that initial lump sum of $20,000. And in reality, you would have no idea whether you should be making the money in two or five months.

The only way to survive these lower income periods is to set aside enough money from your higher income periods. Unfortunately, in America we are quite bad at saving.

I don’t know if that stems from a need to keep up with the Joneses or an inability to delay gratification, but the fact remains. As a result, most people with irregular incomes struggle to survive while earning less.

📗 Learn more: Ever wondered why so many Americans live paycheck to paycheck and struggle to save? Check out our fascinating analysis on the topic: Are Americans Bad At Saving Money?

How to budget with an irregular income?

We found that the two main challenges of budgeting with irregular income are determining the right levels of spending without knowing your exact income and surviving prolonged periods of reduced income.

Here’s a step-by-step strategy for overcoming those obstacles.

1. Track Your Current Spending

As an accountant and personal finance writer, I’ve had dozens of people approach me for advice on how to get better with money. My first recommendation is almost always that they start tracking their expenses.

Before you can make any financial decisions, you need to know how much it costs to maintain your current lifestyle. Otherwise, any claim you make about your finances is a gamble.

For example, you need to know your expenses to find out:

Whether you’re on track for retirementHow long a fixed amount of savings can support youHow long it takes you to save for something or pay off a debt

Your current expenses are also vital for creating a budget when your income is inconsistent. You need to know how much it costs to maintain your current lifestyle before you can adjust your spending up or down.

The easiest way to keep track of your current spending is to link your bank account and credit card to software like Mint. It even categorizes your transactions, as long as you don’t spend cash.

Once you have a month or two of data, you can use it to project your expenses for an entire year. Don’t forget to include your annual expenses, such as car insurance and registration payments.

📗 Learn more: Choose the right set of budgeting tools to tackle the actual mechanics of implementing your budget: 5 best budgeting tools to keep your finances on track.

2. Determine your unavoidable costs

Once you have an accurate picture of your current expenses, you can sort through your expenses to find out which ones are unavoidable in your current position. That usually includes food, housing, transportation, debt payments, and insurance premiums.

In other words, if your income is falling and you need to reduce your expenses as much as possible, what could you not eliminate?

☝️ Remember that you may face that reality unexpectedly and you will not have time to make significant changes when this happens.

For example, you can’t count on moving to another apartment in no time to lower your rent, so factor in the cost of your current living situation.

3. Predict your worst-case income

Next, let’s put the expenses aside for a bit and tackle your income. Even though you can’t predict exactly how much you’re going to make, you should still be able to imagine the approximate best and worst scenarios.

If you have inconsistent income, you generally have to count on the worst. Ideally, you always want to avoid spending more than you earn in any given month, and budgeting for your worst-case scenario prevents that.

👉 Suppose, for example, that you are self-employed and sell various products online. Your income is about $3,000 during quiet months, but $5,000 on average and $7,000 around the holidays that give gifts. You would want to use $3,000 as your worst monthly income.

4. Compare your numbers

At this point, you should have three numbers in front of you: your current expenses, unavoidable expenses, and worst-case income. The relationship between them tells you what your next steps are. Let’s take a look at all the options.

First, if your current expenses are less than your worst-case income, you’re free. You don’t have to change your budget right away, and you can easily spend all your excess earnings toward your savings goals.

Second, if your current expenses exceed your worst-case income, but your fixed expenses are not, you need to tighten your budget. Cut your discretionary expenses until your expenses are less than your worst-case income.

Third, if your unavoidable expenses exceed your worst-case income, you’re at risk. A single month of low income leaves you with necessary payments, such as your rent or a loan. If you are in this situation, continue to the next step.

5. Set aside savings for any shortfalls

If you know that you will eventually run into periods when your unavoidable expenses exceed your income, the only way to avoid missing out on essential payments is to tap into your savings.

👉 For example, suppose you earn between $3,000 and $6,000 each month, but your fixed expenses are $3,500. The only way to get through a month of $3,000 income without getting into debt is to take $500 out of your cash reserves.

To figure out how much you need in savings, consider your worst-case income and unavoidable expenses. If you know that your worst-case income is $1,000 less than your fixed expenses, you should at least have that much on hand.

The concept is the same if you have zero income months. If the worst-case scenario is that you have three months without income, keep at least three months of expenses available.

When in doubt, save

If I could help anyone understand one financial concept, it would be that you should always live well within your means. It’s a simple idea, but surprisingly difficult to execute. You can find people making $350,000 a year complaining that it’s just too hard to make ends meet.

If you don’t know your resources because of your inconsistent income, be careful and keep your expenses as low as possible.

If you manage to spend a year or two less than you earn, you’ll notice something magical happen: you start accumulating money. Once it becomes more than you know what to do with it, you can start investing in assets. Eventually you will become immune to the financial worries that most people face.

With just $500 in savings, you’ll be living on the cutting edge. A single surprising expense can leave you in debt. But what about if you have $5,000 or $50,000? At some point, it doesn’t matter if your income fluctuates because you have enough money to survive for months without any income.

So if you’re having trouble budgeting for an irregular income and want the simplest solution, cut your expenses to the bone and save as much as you can. Your future self will thank you.

📗 More information: Are you interested in saving more money? Check out some of our favorite ways to get started: How much can you save per year?

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