Budgeting is difficult enough when you have the same income every month, but folks with irregular or seasonal income might as well be budgeting on hard mode.
Budgeting can be a real pain. It not only means spending less money on things, but it also means taking time out of your busy day to craft and track your budget—time you’d probably rather spend doing almost anything else.
But while it can be annoying to spend an hour or two elbows-deep in spreadsheets, budgeting can be downright infuriating if you don’t have a regular income.
At a basic level, making a budget means writing down all your income and expenses each month, and then figuring out what you can cut down on. That’s a lot more difficult to do if you don’t have the same income every month.
Do you average your income out across the year? What about the months where you’ll inevitably come up short? On the other hand, if you base your budget off the month in which you get the least amount of income in any given year, you might not be getting an accurate picture either.
So how can you budget if you have different income month to month? We spoke to the experts to find out!
Use a big sample size.
While just averaging out multiple months of income isn’t a silver bullet of budgeting, it is a good place to start. Just make sure you have a big enough sample size.
“The most important aspect to budgeting on an irregular income is forecasting and projecting as closely as possible,” Kelan Kline of The Savvy Couple told us. “Whether you are a business owner, car salesman, or work a job with flexible hours, you should be able to calculate your projected earnings.
“As you go it will get easier because you have a larger sample size to pull data from. You can start tracking your ‘six-month earnings’ which will help better project your future earnings.”
This is especially important if your job is seasonal in nature.
Here’s an example from business consultant Ken “Mr. Biz” Wentworth:
“The key to overcoming seasonal/cyclical income is to develop your budget based on history. For example, if your business is seasonal, you can determine the average of your total annual revenue that occurs for each month of the year.
“Too often, people get lazy and straight-line their budget. That produces an almost useless budget. You can’t make informed decisions if you don’t accurately know how you’re trending vs. your annual target.
“If you ignore seasonality with a $1.2 million annual goal, you will project a monthly revenue goal of $100k. However, what if you run a northern business that is dependent upon the weather? Something such as a lawn care company. Most northern climate lawn care companies make the bulk of their revenues in the April through September timeframe. So, January through March are SLOW months.
“Without including cyclicality in your budget, at the end of March you would expect to have $300K in revenue ($1.2 million / 12 months = 100k per month). However, you have $0 in revenue! You would be ready to jump off the nearest tall building because you are $300K behind! That scenario does not account for the seasonality in your business.
“On the flip side, what if your business made the majority of its revenue in the winter months?
Let’s say through the end of March you have accumulated $450K of revenue. If you just use the straight-line method, you will be popping champagne bottles because you will think you are 50 percent ahead of budget:
Straight-line budget through March = $300K of revenue
Actual revenue = $450K
$150K above a $300K budget = 50% on the plus side!
“In this scenario, you are about to head into several months with no revenue. Let’s say April through October don’t amount to any revenue. Put another way—you need to earn all of your $1.2 million in annual revenue during November-March. That’s just five months!
“While this is a bit of an extreme example, these types of cyclical scenarios do exist. Depending on your industry, it may even be prevalent.”
Figure out what you can cut.
Once you have a good picture of your budget, it’s time to figure out where you can make cuts.
“When budgeting from paycheck to paycheck, you need to establish exactly what outgoing expenditure you cannot cut from your budget,” advised Kraig Martin, commercial director at Storage Vault. “This includes basics like rent, utilities, travel, and food.
“Next, make a separate list of regular expenditures that aren’t classed as essential, whether this is meeting up for coffee with friends or your Netflix subscription. When you get paid, you will clearly be able to prioritize expenditures.”
Emergency fund, emergency fund, emergency fund.
Having an emergency fund is important no matter your financial situation. We’ve mentioned it a few times before. But it’s all the more important if you aren’t certain of what your next paycheck will bring, or if this month will even have a paycheck.
“You need to establish a larger emergency savings fund,” explained CPA Riley Adams. “Ideally, you’d have a six-month cushion to cover your bare necessities. However, because of the unpredictability of your income, you might wish to budget for 9-12 months of expenses to add some cushion.”
Kline echoed the emergency fund advice: “As always it’s important to have a little buffer in your budget and even more important to have an emergency fund set up when your income dips from time to time.”
Even if you have a regular income, you should be putting money into an emergency fund as often as you can.
Whatever you do, stay disciplined.
It can be easy to get a few good months in a row and think you can loosen up your budget a little. But that’s not a great path to go down.
“Another trick is to fight lifestyle inflation if you get a few good months of income in a row,” warned Adams. “It can be deceiving and make you think this newfound income level is here to stay.
“A best practice would be to average your previous 12 months of expenses and use that as your baseline spend. This fights the urge to spend more when you’re making more.”
Having an irregular income is like playing the budget game on hard mode. But with practice, you too can get the high score!
Kelan and Brittany Kline aka The Savvy Couple are two thriving millennials that are daring to live differently. They started their personal finance blog in September 2016 to help others get money $avvy so they can live a frugal and free lifestyle. Brittany is a full-time 4th-grade teacher and Kelan runs The Savvy Couple full-time and works as a digital marketer. You can follow them here: Facebook, Twitter, Pinterest, and Instagram.
Kraig Martin is the Commercial Director at Storage Vault (@storagevault), one of Scotland’s largest self-storage companies. He is passionate about being money-smart, and, through this role, he has developed and refined his financial management skills, monitoring the company’s turnover, profit, and budgeting.
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