5 tips for budgeting with an irregular income
As a freelance writer, my income can change a lot from month to month. And I'm not the only one. With more and more people making a living in the gig economy, more and more of us don't have a regular predictable paycheck.
That can be a problem when it comes to making a budget, as standard budgeting methods typically involve making sure your spending and savings don't exceed the amount of income you have. When earnings change a lot from one month to the next, this isn't always easy to do.
This doesn't mean people with variable income can't make a budget. In fact, it may be even more important to put limits on spending and set goals for saving when you can't count on a certain amount of money coming in. But it does mean that a different budgeting technique is often necessary.
Not sure how to get started? Try these simple tips for budgeting on an irregular income.
1. Figure out what your essential monthly expenses are
There are things you have to pay each month, such as the cost of rent, transportation, and food.
Since these are must-pay expenses, they need to be included in your budget every single month. Make a list of them, along with the amounts you need for each. This will give you a good idea of the amount you must ensure is available.
When listing expenses, include contributions to retirement savings accounts. If you're self-employed, you probably don't have a workplace 401(k), so you need to make sure you're preparing for your own retirement.
2. Budget a reasonable sum for discretionary spending
Next, figure out the amount you want to spend on things such as entertainment, clothing, dining out, and other discretionary purchases. You can track your spending over about 30 days to determine what you're currently spending on these purchases and then decide if you want to make any cuts.
3. Determine what your minimum monthly income is likely to be
Look back at the last 12 months of earnings to see what your lowest-earning month was. Or if you're just getting started as a self-employed or gig worker, figure out what jobs you have lined up to estimate what you're likely to make.
If there's a big disparity between your estimates of how much you need to spend and your low estimate for earnings, this suggests a problem. You'll need to either cut spending, find a way to boost minimum earnings, or make sure you're saving enough in your good months to cover the slow times.
4. Pay yourself a salary equal to the amount you need
When you know what you need to spend on the essentials and to have a little fun, set your "salary" equal to that amount. If you've determined you need $2,500 a month for necessary spending and discretionary spending, for example, you could set this as the amount you pay yourself.
You can either pay yourself this money on the first of the month, essentially spending the prior month's income, or pay yourself throughout the month as you earn money.
It will be harder to spend last month's income when you first start working or are just beginning to live on a budget if you were living paycheck-to-paycheck before. Try to reach a point where you can do this as soon as possible so you have predictable, regular income you can count on.
5. Save the rest
Anything left over after paying yourself a salary can go into savings accounts.
You should build up an emergency fund first, which should be on the larger side since you're more at risk of having slow months when your income is irregular than if you earn a steady paycheck. And if your earnings are irregular throughout the year, especially if that's due to seasonal variations, create an account that you'll pay your salary from during the slow times.
You can also have savings accounts for vacations or big purchases, or you can pad your retirement savings. Each month that you have a surplus, make the choice about which accounts to contribute to.
This budgeting method makes living on an irregular income easier
Living without certainty about what next month's income will be requires a little creative financial planning. By following these tips for budgeting on an irregular income, you can make sure you have enough money to cover your needs on a regular basis while also making your future more secure.
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This material is provided by Voya for general and educational purposes only; it is not intended to provide legal, tax, or investment advice. All investments are subject to risk. Please consult an independent tax, legal, or financial professional for specific advice about your individual situation.