If your income fluctuates, use a budgeting strategy that will work for you in both good times and leaner times.
When you're a student with a student loan, a self-employed entrepreneur or someone who depends heavily on commission or seasonal income, you might be tired of hearing everyone tell you that a budget will make managing money easier. When you have irregular income, what if creating a budget is the problem?
If you have fluctuating income, seasonal employment or if you depend on lump sums of money to carry you through several months of expenses, creating a budget can be extremely difficult.
The trick is that while your income fluctuates, with some careful planning, your spending doesn't have to. Here are 3 ways to budget with irregular income.
Getting Started with a Budget - How to Plan for Expenses
Before trying one of the strategies below, take time to identify your expenses. List out your regular weekly and monthly commitments.
Then add in amounts for the less regular expenses you need to spend money on. These can be harder to identify than the regularly occurring expenses, so pull out your calendar and some bank or credit card statements and start reconstructing your spending habits.
Another great way to identify your spending habits it to write down where you spend your money. People who track their spending for at least a couple of weeks are often very surprised when they look back and their spending journal reveals where they actually spent their money.
3 Budgeting Strategies When You Have Irregular, Seasonal or Fluctuating Income
When your income fluctuates, or you have irregular, seasonal, or sporadic income, focus on planning and implementing a budgeting and money management strategy that keeps your spending from fluctuating.
Here are 3 personal budgeting and money management strategies to get you started:
1. Budget Using Your Average Income
If you have had irregular income for a few years, one strategy is to calculate the average net income you’ve had each year for at least 3 years, divide by 12 and use that amount to build your current monthly budget. If this amount is not enough to meet all of your expenses, you must consider how you can supplement and increase your income on a regular basis or decrease your expenses to make your budget balance.
If you are self-employed, part of the planning process for any budgeting strategy must include a separate savings account for income tax payments.
2. Budget Using a Holding Account - This Method Works Well for Students
Another strategy is to set up a holding account. All of your income, including tax refunds, gifts, bonuses, student loans, etc., is deposited into the holding account. You pay yourself a monthly amount based on what you have identified you can afford and what will allow you to meet your obligations. During months of higher income, the holding account will have a larger balance. During the leaner months, the holding account balance will decrease. However, the amount you pay yourself does not vary from month to month.
A Special Budgeting Note for Students
For post-secondary students who are trying to budget with a lump sum of money, the holding account method is usually the easiest. With loan, grant, bursary, scholarship or money saved up from working over the summer, it can be much too easy to spend it all at once. By using a holding account and taking a "pay cheque" out every two weeks, it's much easier to make the money last as long as it needs to.
3. Use Two Budgets: One for Good Times & Another for Leaner Times
A third way to deal with irregular income is to have two budgets, one for the better months and one for the leaner months. For most people, this is the hardest way to manage their money effectively because it’s easy to get into a spending habit during the better months and then feel deprived during the leaner months.
With two budgets, some people are tempted to spend because they expect to have money again in the better months ahead. They rely on credit to supplement their leaner times, which results in a cycle of debt and spending habits that becomes expensive and difficult to break.
The Bottom Line with a Personal Budget When Income is Irregular
A personal budget allows you to focus on what you can do rather than on what you can't, even if you have irregular income. Taking the time to create a realistic budget makes it easier to manage your money so that you can focus on spending time and energy on what's important to you.
What do you do to manage your budget and spending with irregular income? Leave a comment below to help someone else!