Financial experts agree that a written budget can help people to save more, get out of debt, and make better spending choices. It seems like an easy task to write out a budget, but it is not simple for everyone. As opposed to a fixed salary, some people earn incomes that vary from month to month. Budgeting with an unpredictable amount of income might seem impossible, but there are ways to make it work.
#1. Start with Expenses
Someone with an irregular income should start by tallying up their monthly expenses. Add up all your regular expenses like utilities, rent, and loan payments. For the more variable expenses, write down an average for what the household spends per month on things like groceries and gas. Track these expenses for a couple of months to avoid underestimating. Then do the same for discretionary income. People often overspend on expenses like entertainment, food, and clothing without realizing it. Finally, include a specific amount to apply towards an emergency fund and other savings plans.
#2. Estimate Base Income
Look at old tax returns for an estimate of what the household brings in each year, after taxes. Divide by 12 to give an average monthly income. In the event of recent changes to the household income, use the lowest-earning month as the base income. Make sure that all expenses can come out of the base income without carrying over into the next month.
#3. Adapt the Budget
It is reasonable to assume the people might not meet budgetary expectations on their first attempt. When making adjustments, look at ways to pare down grocery costs or unnecessary expenses rather than reduce savings. Some examples might include canceling unused gym memberships, using streaming services instead of cable, and dining out fewer times per month.
#4. Set an Amount
To make the math simple, say the budget totals $4,300 per month. There are about 4.3 weeks each month, so the family needs about $1,000 a week. When the household earns $1,500 in a week, set aside $500 and use the remainder for budgeted items. Keep the $500 tucked away for the weeks when the family does not meet the necessary $1,000 requirement. Do not change the budget every time household income increases for a few months. Irregular income can drop as fast as it increases, and it is vitally important to have extra cash available for those moments. Only adjust the budget if the income becomes a regular established paycheck.