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It’s easy to read all of the budgeting and debt payoff articles that promise a simple plan to get you out of debt and your budget on track, but those plans can be hard to navigate if your budget consists mostly or completely of irregular income. You might be a waitress that relies on the generosity of your customer’s tips, may get laid off every winter or, perhaps, are simply a business owner who relies on contractors to get their work done first before you get paid.
If that’s you: worry no longer because today we are going to address each facet of that irregular income and get you on your way to a budget that suits your family with the potential to meet your future goals, whether that’s debt payoff, savings, or retiring early.
Two Incomes: One Fixed (Monthly) and One Irregular
If you have irregular income but are blessed to have one spouse with a regular income, budgeting is simply a matter of prioritizing. Start by making a list of all the necessities you have to pay for each month. For me, that would include rent/mortgage payment, utilities, car payment and transportation costs, food, and minimum credit card payments. Ideally, anything that would keep you from being able to live as you currently do or would put you into further debt by not paying it on time. List those items in order of importance.
Determine how much fixed income you have (this is the amount that is deposited into your bank account for use), and then begin to subtract your necessary expenses from that amount. For example: If my husband receives $2500 at the beginning of each month, I will subtract that list of expenses I just created from his income until there’s no more income to distribute. See the example below:
In this case, and because the numbers are made up, each of the critical expenses can be paid for by that one fixed income, however, if the fixed income is lower than your necessary expenses, you will need to prioritize. Let’s pretend he only makes $2200, but the expenses are the same. That leaves us $300 short of being able to pay our critical expenses.
If this were my budget, knowing that I had a second income coming in at some point in time, I would prioritize the housing, transportation (it’s how my husband gets paid), and debt payments. While it’s not ideal, I know that my utility companies have a grace period of between 30 to 60 days before they charge a late fee. In that case, I’m going to put the utility payment on the back burner until we get the irregular income. Additionally, I am aware that we can eat cheaper food and may be able to cut back on groceries this month, so I will quickly slash the food budget by $150.
Is it ideal? No, but it works.
When the irregular income comes in, whether it happens later in the month or a couple months from now, that utility payment needs to be paid in full immediately, and I will need to take care of any additional expenses our family has. These will likely include: replenishing dry foods in the cupboard that might have been used during the spending halt, household maintenance, savings, personal expenses, phones, cable, internet, spending money, and paying down credit card debt (beyond those minimum payments that have already been addressed).
Of course, perhaps you don’t need a transportation budget and can walk to work. In that case, your critical expenses might include that phone, cable, or internet. Every budget is different because each person is different.
Two Incomes: One Fixed (Twice Monthly) and One Irregular
Having a fixed income that is paid out twice monthly is a very similar process, except that the critical expenses will have to be split over two pay periods. For example, if we use our original calculation above, a monthly total fixed income of $2500 would, in theory, be $1250 per pay period. So instead of one column, we will use two, as follows:
When the irregular income comes in, use it the same way as before, applied first to any critical expenses that weren’t paid by the fixed income, and then to any additional expenses.
One (or Two) Irregular Incomes
This is the type of income that comes in types of employment in which you are either paid a fee to complete a job, possibly one that takes weeks or months at a time, or a commission-based job such as a real estate agent, among others. If you are in this situation, then you might not see any income for weeks or months at a time, only to have a huge lump payout all at once. It’s inconsistent and can create loads of frustration if you aren’t careful.
Once again, it’s necessary to calculate all of your monthly living expenses. In this case, you want to calculate the critical expenses AND any additional expenses you have.
That total is how much you should have in your account at all times to cover your expenses. I’m not talking about your emergency fund, you need one of those as well to cover those unexpected expenses. No, rather, I’m talking about a “fund” you borrow from that allows you to pay all of your monthly bills until such time as you get that lump sum payment. At that point, you reimburse that account up to its full amount and use the remaining money to pay off debt, add to your savings, or invest. This fund should contain enough money to cover the longest amount of time between income that you can expect. (If it’s two months in between payments, then you should have two months’ worth of money in that fund.)
Keep this money in a savings account from which you can transfer money if you don’t get paid. Each time you transfer money, consider it “paying yourself” for that month, and replenish the fund when the income does show up. This will keep you from defaulting on payments and your family will still be able to eat and enjoy the lifestyle you have budgeted for.
Remember that this fund is not slated to be used for anything that’s not included in your budget. That means that if the opportunity comes up for a spur of the moment vacation, and you haven’t been paid in a month, it’s not the time to do so. Wait until you get paid, and allocate the remainder of that income to your savings funds, whether that be vacation fund or home improvement.
It’s Possible to Budget Irregular Income
I told you it was possible, but I didn’t say it would be easy. Creating a budget and sticking with it is hard work, but trust me, it is worth it. What I haven’t mentioned, though, and it’s important, is that the key to budgeting, whether your income is fixed or irregular, is keeping your expenses below the amount you make. If you spend more than you make, your budget will fail every time, no matter when the income shows up, so double check your expenses and cut out anything that’s not necessary. In the long run, you probably won’t miss it anyway.