What do freelancers, restaurant servers, and landscapers have in common? They all earn irregular incomes that can make it difficult to create and follow budgets.
Getting paid different amounts from one month to the next might complicate your budget, but it shouldn't make budgeting impossible. You can take control of your family budget on an irregular income by following these five tips.
You need to earn a base amount of money to pay necessary monthly expenses, so you should start by making a bare-bones budget that ensures you have enough money to pay your mortgage, insurance, utility bills, and other repeating expenses.
Once you know how much you need for those recurring expenses, add other necessities to your budget. These would include items like clothing, food, and transportation.
If you carry high-interest credit card debt, then you need to include repayment in your budget. Families that have several credit cards should focus on repaying the account that charges the highest interest rate.
Your irregular income may not let you know exactly how much you can afford to contribute to debt repayment each month, but you can set a minimum payment. Don't, however, follow the minimum payment that your credit card gives you. Paying the minimum will keep you in debt for years longer than necessary.
During months when you earn more money than usual, you can spend more money on debt repayment. During months when you don't earn much, or any, money, you can pay your minimum. As long as you're working toward a zero balance, you're heading in the right direction.
Most Americans live paycheck to paycheck. About 40% of Americans don't even have $400 saved for unexpected expenses. People with regular, predictable incomes might feel comfortable living this way. When your household has an irregular income, though, you can't take any chances.
Your family budget should include saving money for unexpected expenses and emergencies. Ideally, you should save enough money to cover your essential expenses for at least three months. If your basic budget says that you need $3,000 to pay your monthly bills, then you should have an emergency fund worth at least $9,000.
Every household should have an emergency fund, but it's even more important for families with irregular incomes. You have to prepare for the worst. What happens when you lose a client, or the landscaping company you work for doesn't rehire you next spring? Without an emergency fund, you won't have enough money to pay for essentials like housing, food, and transportation.
If making a budget for an irregular income seems too complicated, then you can eliminate the ambiguity by paying yourself a regular salary. When money comes in, put it in a savings account so it can earn interest. When payday arrives, pay yourself a set amount from your savings to create the illusion that you have a regular income.
Following this tip will erase the ups and downs of an irregular income. As long as you can resist the urge to dip into your savings for extra cash, this technique should work well from you. At the end of the year, you should have money left over in your savings account. You can decide to use that money to pay down your debt, increase your emergency savings, or give yourself a bonus.
Your baseline budget fluctuates as often as your income. During the winter, you probably spend more money on utilities than you do during spring. If you don't revisit your budget often, these changes can disrupt your plan.
Over time, you should find that you can estimate next month's expenses. It may take a year or longer, though, before you have enough data to make accurate predictions. Once you have an established budget that works well throughout the year, you should still have family meetings to discuss your finances. Your financial situation can change quickly when you have an irregular income. One month, you may earn significantly more money than you expected. Sitting down with other members of your household will help you decide what to do with the extra income.
Your monthly budget meetings should also include discussions about the future. Do you have enough money saved to go on vacation this year? If not, what expenses can you reduce to devote more money to the vacation? Does someone in your family have an old car that might not last much longer? If so, then you may need to add a line item to your budget.
Having an irregular income doesn't have to mean living with financial unpredictability. As long as you make an accurate budget that includes room for saving and investing money, you can take control of your finances.
In some ways, an irregular income can force you to use money more responsibly than people with regular incomes. When you know that your income will experience ups and downs, you're forced to plan for the future. Many people don't realize the importance of planning until it's too late.