Budgeting is crucial for financial stability. However, almost every piece of budgeting advice starts off by telling you to assess your monthly income, which is easy for those with steady paychecks but a little trickier for those with irregular incomes.
So, how do you budget when your income fluctuates from month to month? Today, we’re taking a look at various strategies and techniques to help you budget when you have an irregular income so you can manage your finances effectively.
Assess Your Financial Situation
Assessing your income and expenditure is the pillar of effective budgeting, regardless of whether you have a steady or irregular income. By keeping track of money coming in and out, you can identify patterns, predict cash flow, and make informed decisions. However, before you create a budget, you must have a clear understanding of your debts, including the total amount owed.
List all your debts with their interest rates and minimum monthly payments. This will help you develop a repayment strategy that prioritises high-interest debts whilst ensuring you meet all minimum payments. Next, track your spending for at least one month to understand where your money goes. Categorise expenses into essentials (housing, utilities, food) and non-essentials (entertainment, dining out).
Additionally, analyse your income history for the past 12 months to identify patterns. Many freelancers and self-employed folk experience seasonal fluctuations, with certain months consistently bringing higher or lower income. Recognising these patterns allows you to plan ahead for leaner periods and make the most of more profitable times.
Create A Monthly Average Budget
The most effective way to budget when you have an irregular income is with a monthly average budget. This involves calculating an average monthly income based on your earnings over a certain period. By doing this, you can create a more realistic budget that accommodates the fluctuating nature of your earnings, setting achievable financial goals for the future in the process.
To calculate your monthly average income, start by adding your total earnings over the last few months and divide the total by the number of months.
Finally, make sure to differentiate between fixed and variable expenses to ensure your budget is as accurate as possible. Alternatively, budgeting for your lowest monthly income will guarantee your major outgoings are always covered.
Prioritise Your Spending
With an irregular income, prioritising your spending is crucial for managing your finances effectively. Put simply, this means separating essential and non-essential expenses. Essential expenses include items like your rent or mortgage, utilities, and groceries, while non-essential expenses might include entertainment, dining out, and subscriptions.
Prioritising your spending can ensure your basic needs are met, even during periods of lower income. Allocating a portion of your budget towards irregular expenses, such as unexpected bills or annual fees, can also prevent you from being caught out.
Leverage A Budgeting App
Technology can be your greatest ally when managing irregular income. A quality budgeting app can streamline financial tracking and provide valuable insights into your spending habits. Look for one that specifically caters to variable income, allowing you to input different income projections each month whilst maintaining your core budget structure.
Many budgeting apps offer features like automatic expense categorisation, bill payment reminders, and customisable savings goals. Some even provide visualisations of your income fluctuations over time, helping you spot patterns you might otherwise miss. With real-time updates accessible from your mobile, you’ll always know exactly where you stand financially, regardless of how your income varies. The investment in a good budgeting app can pay dividends in reduced financial stress and improved money management.
Build An Emergency Fund
Building an emergency fund is solid financial advice for anyone, but especially those with an irregular income. This can serve as a financial safety net to cover you in the event of an unexpected expense or just to support you during periods of lower income.
Not being able to predict your income can be daunting but having an emergency fund in place can provide peace of mind during uncertain times.
Make regular contributions and aim to save between three and six months’ worth of living expenses. If you struggle to save, consider automating your savings so you can set money aside with minimal effort.
Create A Budgeting Buffer
When it comes to budgeting, a buffer can help you smooth out any fluctuations in your income and expenses by providing a cushion for unexpected expenses or months where your income is lower than usual. Determine an ideal buffer amount based on your financial situation and comfort level.
This can be a fixed amount or a percentage of your monthly average income. By creating a budgeting buffer, you can plan for the reality of having an irregular income and avoid having to borrow money which can lead you down the path of a vicious debt cycle.
Adjust Your Budget Over Time
Income fluctuations are a regular challenge for those with an irregular income but there are steps you can take to soften the blow of unexpected costs. By remaining flexible and adjusting your budget as required, you can learn to navigate income fluctuations from month to month.
During months of high income, consider allocating a portion towards your emergency fund, debt repayment, or long-term savings goals. When experiencing low-income periods, review your budget and make necessary adjustments, such as cutting back on non-essential spending or finding ways to generate additional income. Taking a proactive approach to budget management is key to navigating income fluctuations.
Save The Excess
Nobody likes an unexpected expense but an unexpected excess can bridge the gap when you have an irregular income. Whether it’s a tax refund, pay raise, or financial gift, making the most of an unexpected income increase can help you budget for those months when your income is lower than expected.
Your first thought might be to treat yourself to a luxury purchase but by adding to your savings, you can ensure it continues to build and works for you. If you’re prioritising debt repayment, extra money can help you become debt-free sooner. Because the interest on your debts is likely higher than the interest on your savings, anything you can pay towards your debt will save you time and money in the long run.
Plan For The Future
Whether you’re happy with an irregular income or looking for something a little more steady, it’s essential that you create a financial plan for the future. Working for yourself can provide maximum freedom and control so it makes sense to have the same approach to your finances.
To make your money work for you, you must have a long-term plan in place. For example, if you earn more than expected, putting the extra amount into a savings account can help you achieve your long-term financial goals and steer clear of non-essential expenses. Planning for the future with an irregular budget can be tricky but it isn’t impossible. With a little careful planning, you too can look forward to a healthy financial future.
Consider, too, diversifying your income streams to create more stability and reduce risk. This might involve taking on complementary freelance work, developing passive income sources, or exploring part-time opportunities that provide more consistent earnings.
Income diversification not only helps to smooth out financial fluctuations but can also protect you if one income source unexpectedly dries up. When budgeting with multiple income streams, track each separately to identify which are most reliable and profitable. This approach creates a financial safety net that can make budgeting with irregular income considerably less stressful and more manageable in the long term.
The Bottom Line
Having an irregular income can make budgeting difficult but it should still be a crucial part of your financial journey. In fact, it’s even more important to have a budget in place if your earnings fluctuate from month to month. Without a clear financial plan in place, it can be easy to lose track of your spending and fall into a cycle of unaffordable debt.
*Anything written by IDEAL Magazine is not intended to constitute financial advice. Always consult with an independent financial adviser or expert before making an investment or any personal finance decisions.*
