Budgeting Irregular Income
What to do when paychecks aren't the same every pay period.
Every time I start a budgeting lesson, at least one person in the group tells me they have an irregular income and they just can’t budget from one month to the next. Whether they are hourly workers, sales professionals, or seasonal employees, they get the same answer, “Yes, you can.” Budgeting is about planning how you will spend the money coming in, and those of us on irregular incomes need to be especially precise with our budgets to avoid accumulating debt in a low-earning month. Let’s take a look at two options for budgeting with irregular income, and the hills and valleys or feast and famine account.
When your income varies from month to month there are some numbers you need to be familiar with to create your budget and make sure you can reach your financial goals. The first set of numbers are your average monthly income, lowest monthly income, and highest monthly income. You also need to know your monthly expenses for an average month, and a very tight budget with all luxuries cut out in case of emergency. Armed with these numbers you can start to make a plan for handling your money in the way that works for you.
First, we’ll discuss the “feast and famine” saving account. This is a specific type of savings account for sales professionals, those who are self-employed, or anyone else with an irregular income. Keep this money in a regular bank savings account as it may be used more often than your emergency fund. In your high earning months, you set a little bit of money back in your feast and famine account to cover your expenses in the low earning months. Your third month of famine account spending would be when you begin to cut back on the budget and use the emergency fund as you work on a plan to increase your income with side hustles or a second job. The feast or famine account is also the only savings over $1,000 I endorse during your debt elimination plan. This is a tool to keep you from sliding back into debt when you have a bad sales or production month, so be careful not to view it as extra money you can use for extraneous spending.
In our example, we’ll say you have a low of $1,800 a month in income, a high of $3,000 a month, and over the course of 12 months, you average $2,400 a month. You add up all your monthly bills, expenses, and debt payments and your bills each month total $2,000. This means in your low months, you earn $200 less than you need for your expenses, but in your average and high months your bills are easily covered. In your high and average months, you need to prepare for paying bills should a low month hit. If you are a seasonal worker and you know you have low months every winter, you can save a little bit each spring, summer, and fall to cover the winter months. If your low months are unpredictable, you should aim to save enough to cover the deficit for 2 -3 months as quickly as possible. Back to the example, our deficit is $200 per month, so we need to have $400-$600 in our feast or famine account. If you have a high month in June, you save $400-$600 when you do your budget for the month. Then, if a low month hits in September, you take out the money to cover your expenses. Make sure that you refill the account the next high month so your safety net doesn’t develop any holes.
The second option is to cut all your expenses and live every month on your lowest possible earnings. In this case, you would use the excess in high and average months to pay off debt quicker, save for large purchases, or invest for the future. This means that you might not be able to pay the same amount towards your goals each month, but you’re guaranteed to have the money you need to cover your expenses even in low months.
Returning to our example, you would create your budget every month to spend $1,800 or less each month to avoid having a deficit in low earning months. With the extra $600 - $1,200 in your average or high-earning months, you are able to increase the amount you put towards your goals drastically. Adding an extra $600 a month towards your goals can make a difference very quickly, and help you stay motivated to stick to the budget and plan for your future.
Whether you choose to live religiously on your lowest income or create a feast and famine account for covering expenses in low months, it is vital that you have a plan for your money every month. Creating a budget is the first step to financial wellness and control over your money, don’t let irregular income stop you from reaching your goals. Schedule a free budget review with one of our coaches and feel secure in your ability to budget with irregular income.