Hills and Valleys
How to budget on an irregular income.
I usually try to write something inspirational and motivational but I thought I’d change it up this month and do something a little more practical. One very common question I get is how to manage the budgeting process when you have a variable, irregular income. I’ll try not to make this too long, so contact me if you need more detail on any of this.
There are basically two types of variable income...somewhat variable, or really really variable. So there are different approaches I recommend.
For those with “somewhat variable” income, we’re probably talking about a married couple where one spouse has a regular job with predictable regular income, and the other is self-employed, or on commission-based sales, and therefore has an irregular income. In this case, you always start with the income that you can be sure of, or reasonably sure of...so, the regular job paycheck(s), and perhaps a base salary if there is one for the person earning commissions. Or a self-employed person may have enough history to know what the minimum they ever make in a month is, and can use that as fairly certain income. Do your budget with that certain income first, always starting with your “4 walls”: food (basic groceries only), then necessary utilities (electricity, water and your heat source), then shelter (rent or mortgage), then transportation (gas for car, insurance, car payment, necessary repairs). Clothing is last and is usually not necessary unless you have growing kids heading back to school soon.
After you cover the four walls, then comes minimum debt payments if you are in baby step 2. After that comes everything else, and frankly everything else is a want, not a need. If you still have some of your certain income left, you are in good shape and can budget some wants.
Once you budget your certain income down to zero, then you make a list of all the things you didn’t cover yet. These are the things you will pay for with any additional income you get throughout the month. List the items and the amount needed for each. Then put a number 1 next to the most important item. Not the cheapest item, the most important! Likewise decide what is #2 most important, and on down the list. Make sure your spouse agrees on the order. Then rewrite the list in order with #1 at the top of the list. When extra income comes in, your decision has already been made as to where that money goes. Just follow the list.
For those with REALLY variable income, for example someone who only gets paid straight commission with no base salary, like real estate agents (especially those just starting out), you need a little different strategy. A new real estate agent might go months with no income and then make $20,000 commission on one home in one fell swoop. If your income is something like this, you need to set up a Hill and Valley fund.
First determine what your bare bones necessity budget looks like. Just your four walls items, really, and your minimum debt payments. Initially when you get a big fat check, cover just those items and put ALL the rest into a separate savings account to draw on in future months when you have no income. This is gonna take some discipline, trust me, but until you have some history in this job you need to save every penny possible. In those lean months, you only use the bare minimum from your hill and valley fund and no more, at least while you are getting started. Until you get a feel for how often you are going to get paid and how much, you need to preserve that fund as long as possible.
Each time you get paid put as much as possible into the fund to get it built up to cover multiple months’ expenses. Then once you establish a pattern of income, you can gradually increase the amount of your monthly budget by including some wants as well as needs. In time you will get to know the normal ebb and flow, and you will withdraw from the fund in leaner months to meet your monthly budget and add to the fund in better months with what you receive over and above your budget. You should end up with a fairly consistent total monthly budget, and a hill and valley fund that rises and falls over time.
The better you get at creating income and the better you get at budgeting, the higher that monthly budget total can become. But at first it’s gonna be a struggle. Not gonna lie. Until you get a little better at predicting your future income, you have to assume you won’t have any for a long time, and really pinch every penny for awhile.
Hope that helps. If the nitty gritty is still bugging you, give me a call and we'll dig into your details.