It is about that time of the month again, budget time! This can be a hard time of the month for people budgeting irregular income. But, being the nerd I am, this is something I look forward to. Which is crazy given I used to hate budgeting with a passion under 1 year ago. There is just something to be said about the fresh start of a new month. Ahh, clear budget. I owe part of my intense budgeting love to EveryDollar, which I talk about at length here. If you still have more of a love/hate with budgets, please keep on reading. I am going to share the wisdom I have learned over the last 9 months on a budget. We also have an irregular income, which can be an issue for many new budget-ers. If you have a more traditional income, these steps will still help you!
What is an IRREGULAR income?
What is an irregular income, you may ask? Well, it occurs when someone is not paid a set rate each week, or biweekly. For example, I have a regular income, because I am on a salary. I know exactly how much money will come in every month. I am type A, and definitely on the anxiety spectrum. So, having one steady income can be amazing. My husband, on the other hand, self employed and his pay varies week to week. Thus, his income is irregular. He works in asphalt and concrete as a contractor. During the Indiana winters, this becomes even more challenging (read: terrifying at times, but we survived our first year!) I also learned that, it can be even harder in the summer months not to squander all the fabulous money rolling in. Thus, I would like to pose the following argument:
It is even more important to live on a budget if you have an irregular income.
Yes, that is correct. I often hear people saying that they cannot budget. With irregular income, it is impossible. It is too hard. Budgets are just for people with regular or steady incomes. I would like to every so politely disagree.
For those of you who have an IRREGULAR income, I Will Show you How I Have learned to Budget like a pro.
The first thing you need to know about budgeting on an irregular income is to give yourself some grace. It will not be perfect, but you can learn how to budget. It has taken me 9 months to feel like I sort-of have things mastered. This does not happen overnight. It takes practice to make perfect. And then again, life has a fun way of making things imperfect.
Step one: Determine minimum Income.
The first step to making an irregular income budget is to figure out the lowest amount of money that has ever come in within a given month. This means that you need to go back, month by month, and see how much money came in. I recommend looking back 6 months to 1 year. For example, it may look like this for our imaginary couple, Joe and Barb.
November: $8,000 | December: $5,100 | January: $4.000 | February: $4,900 | March: $6,000
Chose the month with the lowest income and budget with this amount. Thus, your budget would be based on $4,000.
Step two: Build your Budget (With Visuals!)
I am a visual learner. Thus, I plan to share our monthly budget before & afters to show how this all works. I use EveryDollar, and you will hear me talk about this often. Good news, it is FREE! Learn more about it here. The first time you start a budget, EveryDollar will give you sample categories to get you started. Thus, you likely can through a budget together in as little as 10 minutes. It really does make it easy. Your budget should always start with giving & saving at the top, and end with a complete list of your debts, smallest to largest regardless of interest rate. The most important part? The 0 based budget.
Income – expenses = $0
Let’s go back to our couple, Joe and Barb. They have $4,000 to budget. They must assign every dollar made this month to a category. This does not mean that they drain their bank account in one month, but that spending is never more than what income is brought home. Thus, all expenses and savings need to be equal to $4,000.
So, how does this look like in real life? Without further ado, here we go with May!
Our May Budget with IRREGULAR Income.
Overall & Percentage Allocations of the Budget:
Step THREE: Make a plan for What to do with Extra income.
Make a written list of things you want to do with any extra income in one month. For example, let’s say Barb loves to get her hair done. She and Joe agree that she can get her hair done if they make extra money this month. They also have car loan and a small credit card loan. So for them, their list may look like this:
Irregular Income Planning:
- Barb Haircut – $100
- Target Credit Card – $400 remaining balance
- Joe Car Loan – $8,000
- Down payment for a house
Step FOUR: Consider Adding Sinking funds.
I have a long, ongoing love/hate relationship with sinking funds. So what the heck are sinking funds? This is when you set aside a small amount of money each month so that large expenses are not big hits to the budget. For us, a big one is car insurance every 6 months. We now set aside 1/6 of the cost of our car insurance monthly, so when it comes time to make the payment, there is already money ready and waiting to cover this expense.
For example, let’s say Barb loves Christmas. Every year, she spends about $600 on Christmas gifts. Every year, this is a huge blow to their December budget. This year, Joe and Barb decide on a sinking fund for Christmas. They take the total amount of money they plan to spend at Christmas ($600) and divide it by the number of months they plan to save (12 months). Thus, Joe and Barb plan to set aside $50 per month, every month until Christmas. Boom, they just made their first sinking fund! If you are still not sure about this concept, try this.
Honesty here, for awhile sinking funds overwhelmed me. I was reading what some Dave Ramsey followers do. Some people literally had a “fund” for everything. The list when on and on. Thus, I decided to do sinking funds for only the big expenses that happen 1-2 times per year. I have no hard and fast science for this. However, these are my current sinking funds:
- Christmas (yearly)
- Gifts (birthdays, baby showers, weddings, etc.)
- Service & car parts (oil changes, etc.)
- License plates (yearly)
- Car insurance (every 6 months)
- Motorcycle Insurance (yearly)
Some people go sinking fund crazy. For example, this blog by Sarah Titus explains sinking funds delightfully and gives 25 examples! Woa.
STEP FIVE. Decide on Cash vs. Debit.
Finally, Dave Ramsey is a HUGE supporter of the use of cash and the envelope system. I personally do not like carrying cash, but I have started using the clip system with cash for just some categories. (I use a wallet I already owned and these cute yet inexpensive clips) Everything else is on debt card or auto-paid right from our checking account, automatically. I am a huge fan of automating everything you can. First, it removes a point of stress. Second, goodbye to late fees forever. YOU NO LONGER HAVE THE OPTION TO USE CREDIT. If you had a good track record with managing money well and successfully living with credit, you likely are not reading this blog. And if it can work for Dave Ramsey, it can work for you too.
So, choose 1-3+ categories where you will use CASH. It is strongly recommend that you choose categories where you tend to overspend the most. Here is what we use cash for:
- Justin Personal Spending Money
- Sarah Personal Spending Money
That’s it! Time to give it a try. Please let me know how it goes and I would be more than happy to answer questions about my own budget.
PS. I am aware that our spending on gas is ridiculous. My husband and I each have a 30 minute highway commute, but in opposite directions. We bought our house because it was central between our two jobs. He uses his full-sized truck for work and I have an SUV for the Indiana winters. We plan to buy a cheaper “Dave” car for me for the non-snowy months. But it is a work in progress. To be continued on how we plan to cut our spending on gas.
Happy Budgeting and Debt Slaying,
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