Whether you have a stable or inconsistent income, budgeting is one of the most important things you can do when managing your money.
What is Budgeting?
Budgeting is simply making a plan for where your income will go BEFORE you receive it. It isn’t expense tracking or checking your online bank balance when walking through the mall. A budget is a clear, written (or typed) plan that you set before money comes in and FOLLOW after it does.
If you have set goals and have a plan to reach them, then you should have a clear objective that your budget is trying to help you attain. Maybe it’s paying off debt, building emergency savings, or saving for a large purchase. Whatever your goal, you will make more progress toward it each month if you are budgeting to do so.
For those of you whose income is the same amount on the same schedule every month this makes a lot of sense. You can easily track how much your income will be in a certain time period and plan accordingly. But what about the large percentage of you who don’t have a consistent income?
How do you budget when you’re paid on commission? What if a large part of your annual income is bonuses? What about hourly folks whose hours range from 30 to 60 in a week depending on the schedule and overtime?
The most common complaint I hear from people in an inconsistent income situation is “I can’t budget because my income is so up and down.” My response to that is NO! You NEED to budget that much more BECAUSE your income is up and down.
Think about it. If you happen to run into a couple of lower pay periods in a row, have you planned to cover your most important expenses? Can you cover your rent or house payment without sweating if the month ends on a low note?
Don’t let your inconsistent income be an excuse not to be organized with a plan. Let it be motivation for you to make sure you have yourself in order, because it’s that much more necessary for you!
Set a Minimum
If you are trying to budget with an inconsistent income, the first step is to establish what you consider the bare minimum possible amount of income you will have in the period you’re budgeting for.
You can base this off of the lowest paycheck you’ve received in the last year or 6 months, but try to pick a number that you’re confident you won’t come up short on. Then, create a budget for that number covering your most important expenses.
Click HERE for step by step instructions of how to create that budget, or HERE if you’d like my Excel spreadsheet already built to use for yourself! This part of the process is identical for consistent and inconsistent incomes.
List Everything Else
Because you’re building that budget off a minimum amount of money, there are probably several budget items that either don’t get covered or that only have minimum amounts covered so far. That’s ok.
After setting your minimum budget, you then need to make a list of everything else you want to pay for within the period for which you’re budgeting.
This list needs to have a desired dollar amount for each item, and needs to be prioritized with the most important things first.
Here’s a simple example. Let’s say I am trying to pay off two credit cards and a student loan. If the total of my normal expenses with minimum payments on these debts included in a month comes to $2,500, and I typically make anywhere from $2,500-$4,000 a month, I will first budget to live on $2,500. This will cover all my minimum debt payments, but doesn’t pay down any balances at an accelerated rate.
Then, I will list each of my debts from smallest balance to largest balance (there are other methods for order of paying debt, and you can see why I use this one here.) That list may look something like this:
Credit Card #1: $325
Credit Card #2: $1,500
Student Loan: $20,000
Use Additional Income to Work Through Your List
Once you have your minimum budget and your list of additional expenses in priority order, the final step is to apply income over and above your minimum budget amount to your list. You have already planned where it will go based on your list of expenses, so now if you get a commission check or some overtime you’re less likely to go blow it instead of getting ahead.
In my example, let’s say that this month I make $3,000. That means I have $500 in addition to what I budgeted to use for my list of items not covered by my minimum budget.
I would cover my $2,500 minimum budget, then take the extra $500 right down my list of prioritized items until it runs out. So the first $325 of it would pay off the first credit card completely, then the remaining $175 would be paid straight to principle on Credit Card #2.
Once the money runs out, you review how the listed amounts changed, and re-order it for the next time.
It’s Not “Found” Money
The trap many people can fall into with an inconsistent income is to treat the larger paychecks like found money. You know what I mean, like the forgotten $20 you find in your coat pocket that immediately causes the Chipotle alarm to go off in your brain (and yes, I’ll have the guacamole!)
When you “find” money, it’s easy to spend it because you are detached from it emotionally.
If you don’t budget for your inconsistent income, it can be really easy to waste a good pay period instead of using it as the gas pedal for your financial progress.
The bottom line is that no matter your situation, you need a plan. You need to budget to reach your goals. The more intentional you are, the sooner you will be financially secure and independent.
Does your income vary month to month? Did I help you? Let me know in the comments!