How to Budget for Irregular Income
Budgeting your income and expenses is a core principle of any personal financial management. Unfortunately, this process can be extremely challenging in some circumstances. Having an irregular source of income can make budgeting extremely difficult. Fortunately, by taking additional steps and getting a broader picture of your financial situation, you can still create a budget to manage your essential expenses and prepare for the future.
Create an average monthly income
Knowing your income month to month can be incredibly challenging. Your best bet in these circumstances is to understand your average monthly income and work backward.
Identify this income by determining how much money you made over the past 6-12 months and build your expenses around that. If you make more than the average, you can build an emergency fund or put additional dollars into savings. You can also recalculate this number every month, giving you a rolling average to help you determine your new monthly income.
Prioritize essential expenses
One of the greatest challenges with having a variable monthly income is that you may be unable to spend money on everything you want. In some cases, if your income dips low enough, you may not even be able to spend money on everything you need.
If that’s the case, you need to have a solid understanding of your essential expenses. Generally speaking, this includes your rent, utilities, grocery bills, credit card bills, healthcare, insurance, and other debt payments that you can’t miss without incurring a significant financial penalty or interruption of a required service.
Everyone has a different definition of an essential expense. For example, some people may send money to a relative or loved one, and these payments may be personally essential. What is important is that you understand what payments are essential to you, then work backward.
Build an emergency fund
Everyone, regardless of their financial situation, needs an emergency fund. An emergency fund can allow you to survive if you lose your income for a certain period. How much of an emergency fund you build varies from person to person. As a rule of thumb, you want to have at least 3-6 months of expenses saved up.
Having an emergency fund is critical if you have a variable source of income. You may need to draw upon this fund in months when your income does not meet your expenses. As such, you need to put money into it during the good months rather than simply spend it on a non-critical item.
Furthermore, you’ll want to ensure you have the right type of financial product for your emergency fund. Keeping an emergency fund in your checking account means you won’t get the chance to earn interest on this money, which will cause it to lose value due to inflation. A savings or money market account may be more appropriate for your needs.
Create a variable budget
Even with an average monthly income, you may need help to create a budget that perfectly meets your expense needs. If so, you may want to consider creating a variable budget. This budget allows you to adjust certain items based on your changing income. For example, if your income rose 10%, you could adjust certain expenses by 10%.
This can be a challenging budget to create, as it may require you to manually adjust certain personal budget categories (like “eating out” or “entertainment”) to match your changing floating income levels. As such, you’ll need to work with a budget program that you are comfortable with and one that allows you to meet your needs.
This type of budget also explains why it is so important that you have an understanding of your most essential expenses and access to an emergency fund. In a perfect world, you will always have more money to budget, not less. Of course, that won’t always be the case. To that end, you’ll need to understand what expenses are fixed (like mortgage or utility bills) — being those you cannot delay. You’ll also need to build a strong emergency fund that you can draw upon in months when your income decreases.
Consider multiple income sources
Budgeting can be extremely challenging if you have only one source of variable income. As such, you may want to consider expanding your income sources. For example, if you have contracting jobs, you can use other websites like Fiverr or Etsy to sell products or services. Doing so can expand your income streams, generate more money, and make budgeting easier.
How Village Bank can help with your financial needs
Everyone needs a strong financial partner to help them manage their day-to-day financial affairs. However, you may need additional assistance if you have a variable income. At Village Bank, we’re here to serve. We offer various personal financial products — including savings, loans, and credit cards — that can help you fit your needs.
Ready to learn more? Contact us today for additional information on how we can help you meet your financial goals.