How to budget when your income is irregular

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Budgeting is already a challenge, but what do you do when your income is irregular? And by irregular, I mean that it’s either unpredictable or it comes in on an irregular schedule.

It’s a tricky proposition, because a budget is basically a means to spread your yearly income evenly across the board, allotting certain amounts of it to pay for certain things. So, if your pay is irregular, it gets hard to make sure the money’s where it should be when the bills are due.

Well, this is our reality; my husband has a regular income, but he also has an irregular income as a volunteer firefighter. Don’t let the name fool you, he does get paid for it, but only twice a year. And the amount fluctuates depending on the number of pages he received in the 6 month period he’s being paid for. I also have some irregular income in the form of coaching fees and freelance writing, both of which are hard to predict.

So, how do I handle all this uncertainty? With math, of course! Those of you who regularly read my articles know by now that in my world, math solves everything.

I simply make my budget for the whole year, using reasonable and conservative estimates for the uncertain income amounts. Using last years’ numbers usually helps me to guess how much fire pay will come in this year, for example. I calculate all our expenses for the year, again using last years’ numbers as a starting point. I roll all the predictable and regular bill payments into one category called “already spent”.

I account for all the uncertainty by calculating what percentage of the total income is being spent in each category. Then, as I track the money coming in, only that percentage of the pay that came in is allotted to each given category as being “available” to spend.

You will very likely have some over-spending in some of the categories, but you can manage general over-spending by simultaneously watching the balance of the total that’s come in minus the total that’s been spent.

Let me demonstrate using an example from my budget:

I’ve budgeted the entire year’s worth of groceries into bi-weekly chunks, but in the six months preceding the fire pay being paid, we will very likely start to run a deficit in this category. To manage this, I watch the total balance and make sure it never goes in the red. So, I know I’ve over-spent on groceries, but there will be an amount accumulating, unspent, in a variable category somewhere to balance this out. When the fire pay finally comes in, the amount “available” in each category will get padded to help bring us to the next fire pay.

The longer you’re budgeting this way, the less this over-spending will happen as the long-term padding effect starts to kick in.

It’s not perfect, but there really is no easy solution to this irregular income dilemma. At least this method helps to make sure that money’s accumulating in each category and that you never go into your overdraft.

Watch my video on how to use this method in Excel and let me know if you have any questions.


  For better viewing: click on the YouTube icon in the bottom right hand corner of the video’s window.

 

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