How Can I Budget With Irregular Income?

How to budget if you're self-employed or a freelancer

Freelancer working at her dining room table using a calculator and a laptop to balance her budget

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How can you budget if you have an irregular income? Let’s say that you are a freelancer, a contractor, or you are otherwise self-employed. You don’t get regular paychecks every two weeks. Instead, you get sporadic payments coming in at random intervals.

Some months you make double what you made the previous month. Other months you make half of what you made the previous month. How can you maintain a budget with all of this randomness in your life? Here are some tips to help you budget despite your irregular income.

Set a Baseline

Look through records of your last two years of income. What is the most amount of money that you made in a particular month? What’s the least amount of money that you made in a particular month? And what’s the average? For the moment, we’re going to focus on the smallest number, the least amount that you made in a particular month.

Create a Budget

Use budgeting worksheets to create a budget based on the least amount that you made in a particular month during the past two years. Since this was the least you made, you can mostly assume that you’ll make a bit more than this each month moving forward. But you should base your budget on the least that you made to keep a margin of safety.

Run through all your expenses, including your fixed and variable expenses, and see if you can make these fit into your budget, based on the least amount that you earned in a month. If you can’t, then start listing your expenses in order of most important to least important.

Follow a worksheet that will help you walk through all of your necessities. Necessities are, by definition, the most important items on your list. They include groceries, housing, electricity, water, and other things that you couldn’t reasonably live without. Discretionary items, on the other hand, are the least important expenditures on your list. These are the expenses that you’ll need to cut if you’re trying to make your budget fit your income.

Plan for Your Goals

Create a plan for your "excess" money. Remember, you’re budgeting based on the least amount that you’ve earned during the past two years. If the previous 23 months are any indication, you’ll be earning at least some extra money throughout most of this time.

Create a plan now for what you’re going to do with that extra money. Otherwise, you run the risk of blowing it. Do you want to save that money toward buying your next car in cash? Do you want to open up college-savings funds for your children? Do you want to create a big retirement savings account or put that money toward paying off debt? Designate your goals and put all of your excess money toward it.

Budget Every Check or Payment

When a check does come in, split it up based on your budgeting categories. Let’s say, for example, that you’ve created a five-category budget. You’ve decided that you’re willing to spend 35% of your money on housing, 15% on debt-payoff, 10% on savings, 15% on transportation and another 25% on everything else.

When you get a check from a client, immediately split that check into the appropriate categories (after first setting aside the appropriate amount for taxes). You could even go so far as to cash the check and put the money in envelopes so that you can use an envelope budgeting strategy.

By dividing every single check that comes in, you can make sure that your budget is aligned with your ideal percentages. In other words, you are not going to run the risk of spending 50% of your money on discretionary items and not having enough left over for groceries.

Build a Large Cash Cushion

If you have an irregular income, the cash cushion is your best friend. By maintaining a balance of several thousand dollars in your account, you’ll have some leeway to cope with months when clients are slow in paying you.

A cash cushion is different from an emergency fund. The cushion is there just to make sure that you can pay all your bills while you’re waiting for your sporadic and irregular income to appear in your mailbox. The emergency fund, however, is a separate account, which you can’t touch unless the worst-case scenario unfolds.

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