Learning how to budget can be intimidating for anyone. This is especially true if you are trying to learn how to budget on an irregular income. For the most part, you have an irregular income if you live mostly on commission or if you are an hourly employee. For example, real estate agents, small business owners, restaurant servers, hourly retail employees, and sales-people usually have a fluctuating monthly income. Therefore, their income is usually irregular.
With your income changing so much, is it possible to make a monthly budget that works? To put it frankly, the answer is yes! You can still learn how to budget on an irregular income.
Why should I budget when I have an irregular income?
You may be thinking that a budget is only for people with stable incomes. After all, people with regular incomes make the same amount every month. While there is some truth to that statement, I would still say you need a budget.
Budgeting is still necessary for building a financial plan. Also, you still want to set financial goals for yourself. Not to mention you still need to plan for emergencies, save for retirement, and make plans for the future. It’s a lot easier to do these things if you have a budget.
Remember, doing a budget is telling your money what to do. You want to make your money work for you. Even if you have an irregular income, you can seize control of your finances. Time to make your money behave!
How to budget on an irregular income
Follow these simple steps to learn how to budget on an irregular income. You’ll find that it’s not much different than how you would normally make a monthly budget. You just need to make a few adjustments.
1. Determine your lowest estimated monthly income
I recommend starting with your lowest estimate for the month. This is typically better than using your average monthly income. Why? Because it’s easier to adjust if you end up making more than your lowest estimate.
You can always add money to your budget, but it’s a lot more difficult to take money away from it. Most likely, you will exceed your lowest estimate most months. This will come into play later!
2. Budget based on your lowest estimated monthly income
There are certain things your money needs to go to first. This is true no regardless of having a regular or irregular income. Here are the four essentials that you need to cover:
- Food: You need to eat. Eating is essential to life, therefore it’s essential to your budget
- Shelter: You need a place to live so you can be protected from the elements
- Transportation: You need to get around so you can go to work and make a living.
- Utilities: You need to keep the lights on and the water running.
After you cover the four essentials, you must determine your other fixed expenses. These include any debt, insurance, gym memberships, internet, and other items. Fixed expenses are usually easy to plan because they rarely change. Just be sure to prioritize essential items such as insurance
As a side note, if you have debt I recommend paying it off as soon as possible. The best way to pay off debt is to use the debt snowball method. Order your debts from smallest to largest, regardless of the interest rate. Then attack your debt with a vengeance!
3. Make adjustments as needed
This is a step you don’t want to skip! Since you’ve made a budget based on your lowest monthly estimate, you’ll need to make adjustments during the month.
For example, let’s say you set your budget for $3,500 this month. You make more sales than anticipated and end up with $4,500. What a great problem to have! Now, what are you going to do with that extra money?
Of course, I recommend using at least some of it towards your long-term and short-term goals. But you can also use some of it for extra fun! It’s your money, so it’s your decision!
4. Create a “Hill and Valley” fund
Don’t miss this! This is especially important if you’re a real estate agent or a small business owner. There will be dry seasons for your sales. The market will slow at some point and you will still need to provide for your family.
So, what is a hill and valley fund? Essentially, this is like an extra emergency fund. I normally recommend everyone having a 3-6 month emergency fund. For those who have an irregular income, I recommend an additional 6-month hill and valley fund.
Setting one up is simple. Whenever you have a good month, simply allocate some of that extra money towards your hill and valley fund. Easy peasy! Over time the fund will grow. When the sales slow down, you will now be able to live comfortably until business picks back up.
The hill and valley fund will help to provide security during those slow seasons. When the hard times hit, having this fund will enable you to continue budgeting as normal.
It’s possible to budget on an irregular income
As you can see, it’s entirely possible to learn how to budget on an irregular income. Indeed, I believe budgeting is even more important for you! Budgeting when you live on commission takes a lot of planning. But planning for the hills and valleys will ensure your success!
One tool you can use to help you is EveryDollar. EveryDollar is the budgeting tool I personally use and I love it! Entering your monthly income and expenses is easy, and you can even set your goals! Of course, there are also other great budgeting tools such as YNAB and Mint. You can even use pen and paper or Excel if you like. Whatever floats your boat!
What if I need help learning how to do this?
Glad you asked! I understand budgeting can sometimes be difficult. This is especially true if you live on an irregular income. Perhaps you also have a lot of debt or simply have run out of steam. Maybe you feel like there’s no fight left in you. That’s where financial coaching can help.
Working with a financial coach helps you to seize control of your financial future. A financial coach can help you build a plan to get out of debt, plan for the future, and build wealth. No matter who you are or what you’ve done, there is still hope for your future.