5 easy tips for budgeting with unpredictable income

While you might know it’s a good idea to build a budget, you may think they only work for people with predictable income. In reality, they’re a good tool for anyone who wants to understand their expenses, plan for emergencies, and pay down debt.

“A budget is essentially you creating a plan for your money, and telling your money what to do,” says Bola Sokunbi, a certified financial education instructor and founder of Clever Girl Finance. “When you have an inconsistent income, a budget is even more important. You need to make sure you're able to pay the bills when you don’t have your full income or any income coming in during some months.”

Creating a monthly budget when your income is inconsistent can give you a shot at financial success. If you’re one of 57 million Americans who freelance, one of the 14 million who work in sales, or you otherwise manage an irregular income, here are five steps to building a budget that works for you.

1. Start with your baseline expenses

First, you'll need to identify the expenses you have to pay on a monthly basis. Look through your bank statements and write down your average expenses from the last six months. Then write out your average income from the same time frame. Let’s say you earn an average of $5,000 a month, and your bills include:

• Rent: $1,470
• Utilities and internet: $170
• Cell phone: $100
• Car payment, insurance, and gasoline: $390
• Groceries: $370

Some bills are paid in a lump sum, like car insurance. To avoid parting with a big chunk of money all at once, include a portion of that bill in your monthly expenses. We’ve done that here. In our example, you must earn at least $2,500 per month after taxes to meet your bare-bones financial obligations.

If you have a partner with a stable income, try to cover these costs—and some or all of your discretionary expenses—with their salary. Then, you have more freedom to direct your variable income toward short- and long-term goals, which we'll get to in a bit.

“Even if your partner has a stable income, you still want to build a buffer so you have savings,” Sokunbi says. “Have a backup plan if that spouse loses their job.”

2. Calculate your discretionary expenses

These are costs you could forgo if necessary. They might include cable television, dining out, weekend getaways, and money spent on your hobbies. If you're struggling to come up with a good estimate, look over your bank or credit card statements from the last few months. In our example, let's use $1,500 as your monthly discretionary spending.

3. Start paying yourself a salary

After calculating your bare-bones budget and discretionary expenses, you know how much you need every month without dipping into savings. In our example, that’s $4,000. Throughout one month, move your earnings into your checking account until you have that $4,000. That's your “salary.”

From now on, deposit all of your earnings into savings. On the first of the month, move $4,000 into your checking account. Keep the rest of your earnings in savings. You should be able to pay your bills and spend on discretionary purchases within your salary.

4. Build an emergency savings fund

Most financial experts, including Sokunbi, recommend having at least three months’ worth of expenses socked away in a liquid savings account. In our example, that’s $12,000. We know—that number may look intimidating, and it’s probably going to take a while for you to get there. That’s OK.

If you earn about $5,000 a month and you need $4,000 for your budget, that means you have $1,000 left over. Because your income varies, this number will likely shift.

“Every time you have a high month, instead of spending your extra money, keep living within that baseline budget,” Sokunbi says. “Then put your extra money into your savings account.”

Any windfalls, such as a tax refund or cash from mom and dad, should also go into savings, and there are other small steps you can take to bulk up your emergency fund.

5. Create savings goals

Once you have a solid emergency savings fund, “you can relax a little bit on your budget,” Sokunbi says. “Treat yourself.”

But that's not permission to go on a spending spree. Start putting money aside to accommodate your other goals, Sokunbi says. Maybe you’re planning a wedding or looking to buy a house. Figure out how much you need to save, and direct your extra earnings toward these goals. Here are some examples:

• High- and low-month fund: Money from this fund covers expenses when you earn less than you need. During the slow months, “you won’t be overwhelmed and won’t need to leverage debt because you have savings set aside,” Sokunbi says. Remember to replenish the fund so you won’t have to draw from your emergency savings.
• Travel fund: If you love to travel, set aside money dedicated to your flights, hotel stays, and vacation spending.
• Car maintenance: “This expense is going to come up, whether you like it or not,” Sokunbi says. “It's just a matter of time.” AAA recommends saving $50 a month for routine maintenance and unexpected repairs.
• Home maintenance: If you own a home, experts recommend saving at least 1% of the home’s value every year. So if your home is worth $300,000 then you’d save $3,000 a year or $250 a month.
• Upcoming expense: This may include those life expenses such as a wedding, down payment, or a baby.

Check in and make adjustments

After a few months, check how the process is going. If you're spending more than you earn, you'll need to re-evaluate. Is there anywhere you can cut back?

Once you’ve looked at savings opportunities, consider how you can increase your income. “That could be through a part-time job, a side hustle, or changing the prices on your products and services if you're a freelancer or entrepreneur,” Sokunbi says.

Sometimes, earning more money is a matter of setting a goal and making a realistic plan to get there. Depending on your job, this may be possible.

“Over time, as you increase your income,” Sokunbi says, “you get to a point where you have enough money to still live life as normal even if you have a slower month or two.”

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