Learn how to budget when your income changes from month to month. These budgeting strategies are perfect for those variable paychecks!
Budgeting

How to Budget With Irregular Income

Learn how to budget when your income fluctuates each month. These two budgeting strategies will help you stick to a budget when you are dealing with irregular income!

Learn how to budget when your income changes from month to month. These budgeting strategies are perfect for those variable paychecks!

What is irregular income?

Irregular income refers to income that changes significantly from month to month

One of the most common budgeting questions I receive is how to create a budget with variable income. If you are self-employed or work on commission (or any other situation that results in irregular income), your income fluctuates more than most people.

These budgeting techniques are designed for individuals with incomes that vary significantly from month to month; not small variations ($100-$200) in your monthly income.

It’s hard to budget when your income is inconsistent

One of the biggest problems with variable income is how are you supposed to stick to a budget when you don’t even know how much you have coming in? Irregular income can definitely make budgeting trickier!

There’s two strategies that will help you combat the unknowns that come along with variable income.

Use the low income method to budget variable income

With the low income method, you’ll determine the absolute minimum you can expect to make in a month.

Review your income from the last 6-12 months and figure out which month was the lowest. This low income amount will be the amount you consider as income when creating your budget.

Low Income Method Example

  • January – $3,000
  • February – $2,300
  • March – $2,500
  • April – $3,100
  • May – $2,400
  • June – $2,700

As you can see in this example, this person’s income has fluctuated by $800. They had a low income month of $2,300 and a high income month of $3,100.

So in this case, you would build your budget based on the low income amount of $2,300. Any excess income would then be allocated to financial goals like paying off debt or building your savings.

If the low income amount isn’t enough

What if the low income month amount isn’t enough to cover your expenses?

You may already know just from looking at that number. Or you may not know until you take a closer look at your monthly expenses.

If you know that the low income amount isn’t going to cover your monthly expenses, then I suggest budgeting your fluctuating income with the next method.

Use the salary method to budget irregular income

With this method, you turn your irregular income into regular income by figuring out what is the minimum income you need to cover all your monthly expenses.

Salary Method Example

  • January – $3,000
  • February – $2,300
  • March – $2,500
  • April – $3,100
  • May – $2,400
  • June – $2,700

Let’s look back at the same example from before. After figuring out expenses, they have figured out that $2,600 is what they need as a bare minimum each month.

How the salary method works to budget fluctuating income

Use a second account and “pay” yourself

To turn your income into feeling like a traditional salary, you’ll need to have a secondary account. This can be another checking account or a savings account. If you go with a savings account, just make sure you are allowed to transfer out of the account without penalty.

You’ll deposit all your income into this secondary account.

Then you’ll transfer the amount you set as your “salary” back to your primary checking account. It can be a monthly lump sum or split into 2 payments if that works better for you.

When you have a high income month, you end up with a cushion in that savings account. Then when you have a low income month, you draw from that cushion. It’s a great way to balance out the highs and lows of irregular income.

How it works in a high income month

January Income: $3,000-$2,600 (“salary”) = $400  (extra cushion for low months)

This might be a little confusing so lets go over an example of how this works.

When you look back at each month, you can see that January was a good month, and they made over their “salary” amount of $2,600. The whole $3,000 of their pay was deposited into their secondary account .

Then, they only would transfer $2,600 of that money back to their primary account for paying bills and expenses. The excess $400 stays in the secondary account until it’s needed in a low month.

February Income: $2,300-$2,600 (“salary”) = -$300 (reduces cushion to $100)

How it works in a low income month

So now lets look at what happens in a low month.

As you can see, February was not a good month for income and they made less than their salary amount of $2,600. The whole $2,300 of their pay was deposited into their secondary account .

Then, they transfer $2,600 to their primary account. This is more than they brought in for the month, so it reduces that cushion that was left from the month before.

Although the salary method is a little more complicated, once you get use to transferring the money between your two accounts, you’ll appreciate having regular income!

Budgeting for variable income

Transforming irregular income into regular income allows you to be consistent in budgeting.

The key to budgeting when your income varies is to find a way to make your income consistent each month. Whether you are able to keep it simple and go with the low income method or need to use the salary method, you are creating a regular income that will allow you to ride out the highs and lows of irregular income.

READ MORE: 2019 Budget Binder-40+ Printables to Organize Your Finances

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