How To Set Up A Budget With Inconsistent Income

how to set up a budget with inconsistent incomeA while back I wrote a pretty thorough article on how to make a budget, but it didn’t really answer the question of how to set up a budget when you don’t have a regular paycheck. Interestingly, I seem to get this question a lot.

The fact is, it is more difficult to set up a budget when you never know how much you are going to make each month – but it still can (and in my opinion) should definitely be done.

I happen to think it is far more important for those with irregular income to set up a budget because of the quick damage that can be caused if you don’t.

I have heard stories from readers who really got themselves into a mess by having a few prosperous months and assuming that it would just stay that way. Then when things go back to “normal” they can’t adjust back to those “normal” spending levels.

How to set it up

1. Get the average of your last 12 months’ earnings

Add them up either in a spreadsheet or piece of paper. Once added, divide the total by 12 to get your average monthly earnings for the year. (If you have 24 months of data, you may consider using that)

This is the figure that if everything stays the same the next 12 months, you should be able to use to set up your budget. But, as we all know, things rarely stay the same and even if they did, you could have a few of the low months in a row that could make things quite challenging.

2. Multiply by 0.8 (or less)

So, for added protection and safety, I like to multiply the average monthly earnings by 0.8 (or less for more safety). As you can see in the example to the right, this would give you $772 as your number that you base your budget off of.

If after tweaking your budget and cutting your expenses like crazy, you still can’t live off of that amount, then you can multiply it by 0.9, but the higher you go, the higher the chance of things not working out.

3. Open a buffer savings account

This is an account that is going to function a little like an emergency fund, but it’s sole purpose is to store up the surplus earnings on good months, so that you can pay the bills on the bad months.

It can be a savings account or money market account, but it should be money that you can easily access and ideally it would be at the same bank you have your checking account – so you can make quick transfers between the accounts.

4. Try it out

Using our example above, we are going to live off of $772 each month. So assuming January is the same, we would have a $78 surplus ($850-$772) which we would then transfer to our surplus account. In February we would have a $428 surplus and in March a $278 surplus – which would give us $748 in our surplus account.

Then when April & May come around we would be able to handle those deficits ($374) just by pulling the funds from our surplus account.

The challenge

The hardest part of all this is being disciplined enough to sock the money into the surplus account and not using it to buy a new entertainment center. It is so easy to think that after a couple good months, it will always stay that way. But, as they say, the best time to put a new roof on your house is when it is sunny. It is a lot easier filling an account up with money after a good month, than after a bad month.

The flaw

And the truth is, while I think this is the best way to try to budget when you don’t have a regular paycheck, it is far from perfect. I mean in reality it is very unlikely that your earnings are going to be EXACTLY the same as they were 12 months ago. Sometimes things trend upwards or downwards over years. But, even though it isn’t perfect this is the best way that I know how to budget in situations like this.

This is just part of the price we pay for being self-employed, in sales, etc. Sometimes we make more, sometimes less, but personally I would choose the challenge of handling irregular income over a steady paycheck any day. It was easier budgeting with a regular paycheck, but I generally only got to see my income increase once a year by 5% (and then saw it go down by 100% when I got laid off). I like living on the edge a little more – don’t you?

More on setting up the budget

Since I wrote such a thorough article about creating and setting up a budget – you can just check that out for more detail. It will show you how to set up the budget after you figured out your income – which I guess what this article is really about.

I used a paper budget (like I mention in that article) for a while, but am now using YNAB (a budgeting software program) and I am really enjoying it. So if you are willing to pay for a budgeting tool, it might be worth checking out.

If you have any other helpful ideas for budgeting with inconsistent income, let us know in the comments below!

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12 Comments
  1. Excellent article! I think this should be required reading for anyone with fluctuating income. I love steps 2 & 3 the most. When I’ve been in this situation before (especially as a musician), I just used the average; but reducing the average and then saving the excess is such a wonderful idea. Like you said, it just takes discipline!

    Thanks!

  2. Adventure-Some Matthew

    I use this strategy for my budgeting, even though I’m not self-employed. As college students, my wife and I both work part-time jobs. Since we don’t work a set number of hours each week, our paycheck changes. To further complicate it, we have trips with school and church that cut into our work times. So, we have found our minimum living costs by averaging them across about 24 months, and use that to base our budget off of.

    It’s worked fine for us so far, and this article outlines the necessary steps quite clearly!

  3. Jason

    I teach the same concept.

    You mention a bit of the reality of this budget. …”in reality it is very unlikely that your earnings are going to be EXACTLY the same as they were 12 months ago. Sometimes things trend upwards or downwards over years.”

    I teach to play it safe with the 80% rule as well, but the people I help tend to increase their earnings over the years. Their SURPLUS fund tends to grow and grow. I always recommend to them to put a cap (limit) on that fund and have rules in place to do something with that excess at the end of each month.

  4. Nicole

    Good morning, again, Bob!

    And, again, God bless you and those you love. I am off to do my budget based off the guidance in this and the how to make a budget article I just read. You, my friend, are a blessing, in-deed. I’ll write here with my successes, challenges, and whatever else.

    In joy,
    Nicole

  5. Willy

    I’m not a church going guy, but I really enjoy everything you do on this blog.
    Used to be a variable income guy, and never really able to get a handle on
    how to make ends meet much of that time. This info above couldn’t much simpler to absorb and use, looks like to me.
    I’m presently trying to make income from the net, so your articles on beginning blogging are very easy to get into mind, unlike many other advise to newbie articles. Keep up the good work.
    God Bless Your Efforts.
    Willy

  6. jeff Smith

    We have this problem. My income is set, my wife’s income is not. She is a free-lance interpreter for the deaf. So if she works, she gets paid; if she does not, then no money – no vacation time. If she takes a week off for vacation – NO INCOME!

    We managed to get a month ahead on our budget – very hard to do – we were VERY blessed on month.

    Now all of THIS month’s income goes into savings. When we do our monthly budget, we can ONLY spend what we made the PREVIOUS month. We adjust the budget accordingly (most of our budget ideas started with a Dave Ramsey course). We do cash-envelope system. So we pay all our bills on the first of the month. Pull the money needed to cover the budget over from savings to checking – just want we made the previous month.

    At the top of our budget for the month we list the income and the date – the date is always last months date on each income entry.

    So far it has worked. We save for the buffer each month. We also save for 3-6 month reserve/emergency.

    This also helps so your are not waiting on a particular check to pay something due mid-month. All the money is already there. No sweat! Well, maybe a little sweat 🙂 BUT, so refreshing to know we are covered.

    I can give more details if it would help someone.

    Hope this helps.

  7. Bob

    Thanks Lori!

  8. Jayne

    Great advise! Just what I was looking for! Thanks! Now if I can just convince my husband to try this and for us not to spend on something we don’t need. That would be a blog in itself. lol

  9. Michael Taylor

    Bob, this is is an interesting twist on the irregular income method of budgeting. It’s very practical and makes a lot of sense. It definitely takes a lot of discipline though. Not sure if we met or not, but I remember seeing you at FinCon13. A great time!

  10. Yardley

    Yeah. I was reading this & thinking, “YNAB would solve this problem.” Then I got to the end…YNAB.

    Seriously, I am on salary, about as steady as it gets, and my income varied by about 20% month to month for one reason or another last year. But with YNAB, I only make a plan/budget for money I have now, not what I expect to get. So I can save for the lean months, as well as those ‘lumpy’ bills like car insurance twice a year.

    I totally agree with you that basing your ‘estimated’ budget on a lean month is wise. But with YNAB, you know exactly how much you have RIGHT NOW that is allocated to groceries or car repair. It’s amazing.

    I think there are other options…look for ‘zero sum’ budgeting. GoodBudget may be similar.

  11. Amanda @ The A&J Muse

    I love the idea of opening up another account for surplus. I think discipline and self-control are key traits to have if you’re on an irregular income. I used to be on an irregular income during uni with my casual job, and even though I knew my shifts a month in advance, they could still be cut at any time. This budgeting method definitely would have been helpful back then!
    Amanda

    • Lauren (SeedTime Editor)

      Thanks for the comment, Amanda!