How to Budget with Irregular Income
Budgeting is one of the most important personal finance tasks you can do. However, it can get tricky if you have one of the thousands of jobs out there that doesn't pay a regular paycheck.
For years, I worked a regular job that paid me every two weeks like clockwork. When I transitioned to being an entrepreneur, my income was a little bumpier. Some months were flush, others were rather lean.
This can make creating a budget difficult, but with a little creativity, you can budget with an irregular income. Here's how to get started:
1. Sign up for two bank accounts. These can be two bank accounts at the same bank or they can be at separate banks. I like to use an online bank because they often make it easy to open sub-accounts.
Have all of your irregular payments deposited into a single bank account, known as a deposit account. Then schedule regular weekly, biweekly or monthly transfers from your deposit account into your main spending account. By funneling all outside payments into one single bank account, you can smooth them out with regular transfers into a spending account you use for your expenses. The accounts will likely both be checking accounts, since you will be doing a lot of transactions.
2. Estimate how much to pay yourself each pay period. This will require a little finesse as you estimate how much you think you'll be paid each year. The goal is to spread out the income so you will need to estimate your annual income and then divide it by the number of pay periods. Then use that divided income for your budget.
For biweekly payments, some months you may have two pay periods, and others you'll have three. For weekly payments, some months you may have four pay periods and others you'll have five. To smooth it out, you can estimate your annual income and divide by 12 for your monthly transfer amount and treat that as your monthly income.
3. Protect against "bumpier" income. Some people have jobs in which the bumpiness is less due to weekly and biweekly payments and more based on how their pay is set up. Commission-based salesmen are a prime example, especially if the beginning of the year is a slow period in their sales cycle. For those jobs, it's possible to run out of money in that deposit account early on. If that sounds like you, then you need to borrow from your savings to cover the transfer, at least in the first year.
4. In the event of a surplus. If you make more than you estimated, you can take a portion of the earnings and roll it over to the next year to buffer any future deficits. It's OK to treat the rest as a bonus.
The goal of smoothing out income is to help budget and make your spending and savings behaviors more consistent. It's unreasonable to match your spending to your income if you have an irregular income, but this process can help you avoid subsisting on Ramen one month and then gorging on takeout the next when you receive a check that's overdue.
Jim Wang is an entrepreneur, who started personal finance blog Bargaineering.com and now discusses how to make money blogging at Microblogger.com.
