I’ve seen that most people think they have an irregular income. If they don’t get paid the exact same on the 15th and last day of the month, they think it’s irregular. They say they cannot budget because they get paid weekly. Some cannot budget because they are paid every two weeks or because they own rental property. Everyone thinks they have a unique situation, and they don’t know how to budget with an irregular income.
When people tell me they have an irregular income, I ask them how much their income fluctuates each month, and they tell me they bring home like $3,000 one month and $3,200 the next month. Let’s not consider that irregular. Irregular income is when your take-home pay is like $2,000 one month and $5,000 the next month.
Some people think they have an irregular income because they get paid every two weeks (as opposed to twice a month), so they have three paychecks in a month every six months. Some people think their income is irregular because they get paid every Friday, which means they have four months where they get 5 paychecks. In these cases, the interval of which you get paid does not make your income irregular. In these two cases, I would suggest you base your monthly budget on four weeks of income each month, and in the months you have an extra paycheck, apply it to your debt, emergency fund, or house payment, depending on which step you are on.
Budgeting with an Irregular Income
When you have an irregular income, budgeting can be harder. There’s no doubt about that. It’s harder because there are unknowns like how much your next paycheck will be or when you will get your next one. This is especially the case when you’re initially starting out trying to run your own business or if you get paid on commission. You need to do three things when budgeting with an irregular income: know your income, prioritize your expenses, and be prepared to change.
Know Your Income
No matter the interval of your income or the amount of each paycheck, you make a certain amount of money each year. This also means you make a certain amount of money, on average, each month. Determine what your income will be for the month by using your 6-month average.
Your 6-month average is the income you use for budgeting. Just because you make a lot of income in one month doesn’t mean you spend it all that month. You need to hold some of that money for the months you don’t make your average. Each month recalculate your 6-month average. In a month where your 6-month average decreases, you need to spend less than the previous month. There might be some months when you need to cut out of your budget something you don’t want to cut. Because of this, I recommend that you budget with your expenses being a little lower than your 6-month take-home pay. This allows you to build up some extra savings and not have to keep cutting your budget when you have a few bad months in a row.
Prioritize Your Expenses
Since your income fluctuates and has the potential to be well below a six-month average, you need to prioritize your expenses each month. If you budget $200 for fun each month and you have an irregular income, you cannot go spend the $200 for fun during the first week of the month. The first week of the month or when you get your first paycheck is when you pay your mortgage. The first week of the month is when you set aside 25% to 50% of your grocery budget. You spend money on your most important items until the income you bring in for that month has those covered. After that, you spend your money on your non-essentials.
You can use a zero-based budget with an irregular income, but you should also consider using an allocated budget for prioritizing your expenses each month. This is where you allocate money from each paycheck and you are very specific as to where those dollars go each pay period. Using an allocated budget causes you to be even more intentional. It causes you to be intentional every time you receive a paycheck.
At a high level, allocated budgeting is when you allocate each paycheck to items in your budget. For example, if your first paycheck of the month is $1,000, $500 of that paycheck needs to be allocated for your mortgage payment that is due on the 15th, $100 is allocated for groceries, $200 is allocated to your minimum debt payments that are due on the 10th of the month, $50 is allocated for gas, $100 for church and charity, and $50 is allocated to your utilities that are due later. Your next paycheck is $1500.00, So you allocate $1000 to your mortgage and another $500 to various expenses in your budget. When your mortgage is due, you now have $1500 to pay it. Each time you receive a paycheck, you allocate the money to the budget items that have the highest priority left for that month.
The key to allocated budgeting is that you cannot spend money on your non-essentials before you spend it on your necessities. You get yourself into a bad situation when you don’t have your priorities in order.
Be Prepared to Change
You must be prepared to change your budget during the month. This is where using an allocated budget can help. When your income keeps decreasing month-over-month, and your 6-month average continues to decrease, you can’t keep spending the same amount of money each month unless you have your emergency fund in place. With no emergency fund in place, if your 6-month average income is decreasing you need to cut things out of your budget or find additional income. It might be where you need to bring home an additional thousand dollars each month for the next couple of months in order to continue your lifestyle.
No matter the frequency of your paychecks or if the amount fluctuates enough for you to have an irregular income budgeting still works. With an irregular income sometimes it’s easier to use an allocated budget instead of a zero-based budget. Prioritize your expenses to make sure your necessities are taken care of first. Be ready to change when life comes at you. These things will set you up for success when you have an irregular income.