Master Your Finances: How to Budget with Irregular Income

The gig economy has changed the nature of work. Millions of people are now employed on a temporary or contract basis. Increasingly, even workers with full-time salaried jobs are relying on side hustles. It could be selling on eBay or Etsy, renting your apartment on VRBO, driving for Uber or Lyft, being a contract employee, freelance writer, or working a seasonal job. Tracking your finances is complicated for those living on inconsistent pay. 

Irregular income, common among self-employed and independent contractors, refers to earnings that aren’t fixed or steady every month. It differs from regular income when a predictable and consistent paycheck is received weekly, bi-weekly, or monthly.

Budgeting with irregular income can be challenging. But you can — and should — budget every month, regardless of your income structure. This post explains how to budget with irregular income. 

Understanding Irregular Income

Earning an irregular income means your paycheck timing and amount are inconsistent. Your monthly income is unpredictable and fluctuates. You may go from making more money one month to earning less the next. 

Irregular income can come from:

• Contract work
• Commission-based income
• Quarterly or annual bonuses
• Service industry with tips 
• Part-time work with varying hours
• Seasonal work like landscaping, retail, or accounting 

Budgeting with Irregular Income 

A budget is your spending plan, considering your expected income and expenses. A budget helps put you in charge of your money and can provide financial security, setting you on the path to achieving your goals. 

A budget can help you:

• Keep your spending in check 
• Make retirement savings easier,
• Help you prepare for emergencies 
• Assist in achieving longer-term financial and life goals

Irregular income can make budgeting difficult, but it’s often even more essential if you don’t have a set monthly income.

Here are seven steps for how to budget with irregular income.

1. Assess Your Income

Once you decide to create a budget, you’re ready to get into the numbers. Gather your income information for as many months as possible, and document the source and total. Income is typically looked at as gross vs. net. 

Gross income is your earnings before taxes or other deductions are applied. The big-picture number gives an overview of your total earnings potential over a year. 

Net income is your gross income reduced by federal and state taxes, Social Security, health insurance premiums, retirement contributions, and other deductions. It’s often called your take-home pay.

Your gross income provides a broad view of your earning capacity, while your net income dictates your day-to-day budgeting. Irregular income makes calculating gross income more challenging, and if taxes and healthcare deductions aren’t made, you’ll need to account for the costs when calculating your expenses.  

2. Calculate Your Monthly Income 

Review your income records for the past one to three years, if possible. If you’re just starting out and don’t have a long income history, start with as many months as possible. Calculate the total earnings for the number of months you have income. 

For example, assume these numbers represent your income:

• January: $2,900
• February: $3,100
• March: $3,100
• April: $4,200
• May: $3,500
• June: $2,700
• July: $3,000
• August: $4,100
• September: $3,500
• October: $4,400
• November: $3,300
• December: $4,200

Calculate your monthly income in one of these ways:

• Option 1. Base your income on the annual monthly average. In this example, we total the income and divide by 12 months. $42,000/12 = $3,500 budget per month.
•  Option 2. Base your income off your lowest month in the past 12-18 months. In this example, that would be $2,700/month.
•  Option 3. Base your income on your average income after you subtract your highest-producing month. In this example, you’d subtract the month of October and average the remaining 11 months to give you a monthly total of $3,418.

Depending on how you calculate your income, it ranges from $2,700 to $3,500 monthly. As you get better at budgeting, you may find one option fits better for you than another. 

3. Identify Your Fixed Expenses

Once you’ve planned for all the money coming in, it’s time to prep for the money going out. That’s right, it’s time to list your expenses. Nondiscretionary or fixed expenses are your critical, must-pay monthly bills. Review your past bank and credit card statements. You’ll want to include: 

• Housing. Rent or mortgage payments. If you own a home, don’t forget annual expenses like property taxes and HOA fees. 
• Utilities. This category includes electricity, water service, heat, cell service, and internet plan.
• Groceries. Exclude eating out and other discretionary food and drink purchases. 
• Transportation. Gas, car payment, registration, maintenance, and public transit fares.
• Insurance. Premiums for auto, home, renters, health, and life insurance. 
• Loan Payments. Secured and unsecured loans, credit cards, and home equity lines of credit. 
• Childcare Costs. Include daycare or nanny pay. For older children, calculate tuition, after-school care, and summer camps.
• Taxes. If taxes aren’t taken from your pay, you’ll want to calculate and set aside money from every paycheck for tax season.   

4. Estimate Your Variable Expenses 

Unlike fixed expenses, variable expenses change from month to month. 

In general, variable expenses are discretionary purchases. They include things like clothing, travel, dining out, gym membership, personal care, entertainment, and streaming services. 

The amount you spend is more within your control.

5. Create a Budget 

Now that you’ve documented your income and expenses, you’ll want to compare your net income to your monthly expenses. Budget for fixed expenses first to ensure you’re covered each month before you decide how much you can put to variable expenses like entertainment and dining out.

If your expenses outpace your income, review your variable expenses to find ways to make cuts. This may include reevaluating how much you spend on groceries, entertainment, and other flexible expenses. Start by eliminating variable costs, since these are much easier to adjust. 

Fixed expenses are more difficult to reduce, though it’s still possible to cut costs. Rent can be cut by finding a less expensive apartment, but it can take additional planning and time to reduce fixed costs.

On the other hand, if you have more income left after listing your expenses, you can increase certain areas of your budget. Ideally, you’d use the extra money to increase your savings, pay down debt, or both. 

6. Build an Emergency Fund

Establish an emergency fund to prepare a safety net. Aim to build an emergency fund covering essential expenses for three to six months. If your income is irregular, you may want a 12-month emergency fund. If this seems too challenging to tackle, start by setting a small amount aside for unplanned expenses as you work toward larger savings goals. 

7. Track Expenses 

Knowing where your money is going empowers you to change your cash flow. Track your spending to find categories to cut back on, such as dining out, so you can divert more money toward other goals, like building up your emergency fund and savings. 

Monitoring expenses throughout the month holds you accountable for your spending. Apps and online tools help make this step easy. 

Review the costs tracked to your planned budget at the end of each month. Then, look for ways to allocate better where your money goes. 

Tools and Techniques for Budgeting with Irregular Income

Budgeting with irregular income requires strategies and techniques to manage finances effectively. You’ll want to learn to navigate income fluctuations and prioritize expenses. It usually takes about six months to get comfortable with budgeting, longer with irregular income. 

When starting to budget for irregular income, you’ll want to: 

• Live Month to Month. At the end of each month, review your budget. Did you overspend? Did you save enough? Continue to adjust your budget based on your findings. Gradually, you’ll arrive at a cash flow that works for you.
• Manage Fluctuating Income. Establish a separate account for irregular income. Add unexpected excesses like a tax refund, extra jobs, or profit from selling items to your savings account. Setting aside money during high-income months will help during low-income months. 
• Pay Your Taxes Monthly. It will take getting used to, but the consistency of paying your taxes monthly keeps your finances steady and your taxes straight.
• Track Due Dates. Organize bills and set reminders to alert you of upcoming expenses. Listing the dates when recurring expenses are expected helps you manage your income.
• Limit Credit Card Usage. Although using credit cards during low-income months is tempting, use them wisely to manage irregularities.
• Plan for the Long Term. Save for retirement or other long-term goals. Set goals and work toward them during higher income-producing months.
• Look for Cuts. During low-income months, look for ways to make extra cuts and make extra cash by skipping restaurants, not buying new clothes, and selling stuff you no longer need.
• Identify Where You Come Up Short. Budgeting with an irregular income requires you to look for warning signs that you won’t have enough cash. Identify ways to get ahead of the shortfall. Can you pick up more hours? Are you waiting on a client to pay? Be proactive about opportunities to get cash. 

Learn More About How to Maximize Your Budget

You may be new to budgeting or new to budgeting with irregular income, but either way, remember it takes practice and self-control. Following a budget may be more challenging when you earn an irregular income, but don’t let inconsistencies intimidate you from taking control of your finances. 

Focus Federal Credit Union has tools and resources to help you learn how to budget for irregular income. Budgeting is a process, and the results are well worth the time you put into planning your money. Contact us today to get started or for help.