Budgeting Part 3 – How to Budget on an Irregular Income

irregular income

Irregular income: How do I budget when my income is different every month?

Irregular income makes it harder to budget, but you still need to budget!  You’ll be off the rails on your financial plan before you blink.  Failure to plan for an irregular income can undo all of the progress you’ve made in the previous months on your regular budget.

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Before looking at the practical tips to an irregular income budget, please take 15-20 minutes to read part 1 and part 2 of this series.  In those posts, I debunk the common myths surrounding the budgeting process.  We’ll also get into the details of how to create a basic budget for your regular income stream.  

The first thing to consider is whether you have a truly irregular income or a fairly regular income with periodic major changes, like a big bonus once or twice a year.

Irregular income type 1: Regular income with big bonuses

If you have a steady salary with bonus opportunities during the year, then you’ll mostly be using the regular budget system that we discussed in part 2 of this series.  When that big bonus hits, you’ll do a regular budget for your typical monthly salary, but you’ll do a separate budget for the bonus.  Before we get into the details of doing that, I want to discuss the importance of doing the major planning long before you get to that month.  

Most people who fall into this category of “regular income plus big bonuses,” know at the beginning of the year when they’ll be getting their bonus as well as an approximate amount to expect for the bonus.  You should think of this part of your income.  Don’t think of it as a bonus, it’s just a big lump sum from your salary given to you all at once.  

If you sit down with your spouse at the beginning of the year and plan your financial goals for the year, think about how to incorporate a plan for the bonus.  

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Irregular income type 1 example:

For example, if you get a $15,000 bonus on July 1st every year, you could use all of that to pay for your children’s daycare expenses for the upcoming year.  In that case, you wouldn’t need to budget for daycare in your monthly budget.  On the other hand, you could just as easily split up that $15,000 to a variety of goals.  As always, it’s up to you and your spouse to determine your financial goals.

For budgeting the big bonus, you’re going to have one budget for your usual monthly salary.  Separate from that, you’ll create a budget for the lump sum bonus.  You might use this to pay off debt, pay down your mortgage, save for a vacation or major purchase, or put it into an emergency fund.  Just like we did with the regular budget, the top of the page should have the amount of the bonus.  

Underneath that, you’ll list the different options you are considering using this money for, and start to allocate the money to the various categories until you reach a point where every dollar of the bonus has been assigned.  Once you feel comfortable with your choices, start distributing the money to the relevant accounts/people to achieve your goals.  Next month, you’re right back to your usual monthly budget.  

Irregular income type 2: irregular monthly income

If your income fluctuates dramatically from month to month, you need to budget a little differently.  Doing a unique budget every single month becomes doubly important here.  Common scenarios that cause people’s income to be truly irregular would include: 

  • jobs with shift work
  • receiving income periodically from profit sharing models of practice
  • sales of real estate or other large assets
  • irregular income streams from side hustles
  • bonuses or dividends from passive income investments.  

So, what do you do in this situation?

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Look at your monthly income for the last 1-2 years.  What is the lowest income you received in a month during that time period?  Start by doing a regular budget for that amount of money.  Follow the principles we discussed in part 2 of this series and allocate every dollar to a category.  You probably won’t have enough money to fill every category, but that’s fine.  

Once you have all of that portion of your budget allocated, you’re going to make a second budget list of all of the other categories you would want to put money in if more is available (most important to least important).  This might include paying extra on debt, building up an emergency fund, saving towards a major purchase, or investing for the future.  

When you get your monthly income check, the first portion goes to the regular budget, and the rest goes to the irregular income budget.  There are lots of options to find free checking accounts with no minimum balance, as referenced in this article (click here).  Don’t get stuck paying dumb fees that don’t offer benefit.

Irregular income type 2 example

Let’s walk through an example using the Irregular Income Worksheet (above).  Let’s say you make an average of $5,000 per month, with a 24-month low of $2,500 and a high of $10,000.  Do your regular budget on $2,500, allocating money to rent/mortgage, utilities, transportation, and food and any other expenses you can cover with the remainder.  Then, make a separate budget on the Irregular Income Worksheet.  

Let’s say you get $6,500 that month.  The first $2,500 goes to the regular monthly budget to cover basic living expenses.  The remaining $4,000 goes to the Irregular Income Worksheet and you allocate money going down the list until there’s no more to allocate.  There probably won’t be enough money to fill all the categories.  

For next month’s Irregular Income Worksheet, take the remaining unfilled categories from this month’s Irregular Income Worksheet and slide them to the top of the list, then add new categories underneath.  

Irregular income pitfalls: What if I have a month with $0 income?

This is not likely to happen unless you lose your job or become disabled, in which case you’ll need to look at your emergency fund and/or disability insurance to get you through that period.  

But, let’s say you have a real possibility of having months where you don’t make enough to cover your regular budget whereas other months you have way more than enough.  In that case, I would consider having a separate checking account or savings account where you keep a full month or two of expenses saved to draw from in the event of a shortfall.  You can replenish that account during a “month of plenty.”

Returning to our previous example, let’s say you get paid purely on shift work or commission, and one month you make only $1,500 instead of your usual $5,000.  If you have a separate “backup” checking account where you keep $2,500-$5,000 for this situation, transfer $1,000 to your main checking account for your regular budget, and use that to cover your budget for the month.  

Then, let’s say the next month you work extra to make up lost ground and you make $7,500.  Put $1,000 back in the “backup” account, put $2,500 in the main checking account for your regular budget, and then use the Irregular Income Worksheet for the remaining $4,000.  

If you can plan ahead for the lean months, you won’t be stuck putting expenses on a credit card or taking out a short-term loan.  

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It’s time to put the plan into action!

If this all seems a bit overwhelming, trust me, you’re not alone.  This takes time to master, like any important skill.  The more you do it, the easier it gets.  There’s really no shortcut to this whole process, and it’s critically important that you use this budgeting plan to take dominion over your finances.  Your money will wander out the door if you don’t have a concrete plan for what you want your money to accomplish for you.  

Go back and take a look at this three part series again, use the free worksheets and just keep practicing.  You’ll get the hang of it, and when you start controlling where your money is going, it’ll feel like you got a raise.  You’ll realize there’s a lot more money in your budget than you thought there was, once you start telling your money exactly what to do.  

Leave a comment below and let us know what budgeting topics you would most like to see us discuss to help you better.

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