We have heard many of you ask about the struggle to budget when your income isn’t regular and consistent. I’m going to be honest upfront and let you know that I’m not an expert in this subject and I don’t have all the answers, but we deal with this a little bit in our personal budget and I have advised other families on this subject.
If the tone of this seems more like advice than personal experience (as Melody has done a great job of sharing her perspective in the other posts in the series) please don’t feel like this is the only way. It is going to be different for everybody, but since people are asking, I wanted to at least address some of these questions.
My husband is in healthcare and works for an hourly rate. While he consistently gets 40 hours a week and has a pretty stable shift, he does get called off of work for low census days (no pay or takes vacation pay), gets overtime somewhat regularly and gets a different pay rate when he works different shifts. So, he has never received a paycheck for the same amount.
When we first started budgeting, this totally overwhelmed me. It seemed easy to me to budget if you knew how much your paycheck was every two weeks or once a month. But, not knowing how much our income would be created two questions for us: How much do we actually have to spend each month? And, what do we do if our actual check is more or less than that?
Let me first start with the disclaimer that there are varying levels of irregular incomes. I grew up in a family where my dad got paid twice a year. This required very serious discipline to manage your finances well. My parents thankfully did an amazing job of modeling good financial stewardship for me. For my family now, our income varies each month by $100 – $700 which feels easier to handle.
I hope that for those of your struggling with how to budget when your income is all over the board, you might find a tip or here two that are helpful to your specific situation.
Also to note is that we follow Dave Ramsey’s Total Money Makeover (Amazon) almost to a tee, so that might give you some perspective on why this is the route we follow.
Know Your Minimum Income
Rather than go off a zero based budget, you can start with the question “What do I need to survive?”. This is your minimum. You must pay the mortgage, buy groceries and pay the electricity bill every month so I’d start there. After you have accumulated up all the “must pays”, that would be your minimum.
Our family created a minimum based on the pay we can typically guarantee my husband will have. It is very bare bones but covers our bills, some savings goals and our flexible monthly expenses (groceries, gas, etc.). If we are short, we take from our flexible expenses to make up the difference. If I feel like I can’t do this, I try and come up with additional income to make up the difference such as selling stuff on Craigslist, selling stuff at consignment shops or picking up extra work here or there.
Have a Backup Plan if You Don’t Make Your Minimum
For the average family, I always suggest having 3-6 months of income saved before you start saving for other goals (retirement, college savings, vacation, a new house, etc.). For a family with an irregular income, you probably need more than less. I recommend six months. It is important to note that 3-6 months of income isn’t necessarily what you spend every month or are budgeted for but also what you need to survive. If my husband were to lose his job, he would be eligible for unemployment so I have figured out what that would be per month and deducted it from our monthly budget to help come up with how much we would need per month.
I also planned to stop contributing to college savings or our 401K in the case that we had an emergent situation like that. This made it MUCH easier to save up six months of living expenses in our emergency account. As Dave Ramsey says, having this helps you avoid “Murphy’s Law” and anytime you have to pull from this, your first financial goal is to to replenish it.
Obviously, we don’t want to just survive! For some of you, the checks will often be above the minimum, for some of you they rarely will be. I’ll just tell you what we do.
Typically, my husband’s check is $100-$300 above our minimum. When he has picked up a ton of overtime, it has been more. This is where our money comes from to put more in our 401K, add additional income to the college accounts, pay off our mortgage, give more generously, buy things we are trying to save for, save for house expenses, etc.
Every paycheck we sit down and assess how much extra money we have extra (if any), what our goals are (we keep a list), what ours and others needs are, and then we allocate the extra money.
We supplement our income with me picking up work where it fits in to our schedule. With three kids four and under, my time is obviously at a premium so it isn’t always an option. I help Melody here, obviously, and we also sell supplements (supplements to supplement, ha!). My son’s preschool offers the opportunity to sub in his class and get paid also! Rather than keeping this additional income in our budget, we use it to meet our financial goals or make up when we don’t hit our minimum. We spend this the same way we do the extra on the paychecks, by using our list of goals to decide where it goes.
I only get paid a few times a year!
For somebody like my father, who I mentioned only got paid twice a year and never knew how much the checks would be, a good approach is to take each check, divide it by the number of months or weeks that you need to live on it, set your minimum aside and then what is left you can allocate from there. It can be helpful to have a list of financial goals in front of you as you allocate that money so you don’t get off track on where that money can be best used.
The best thing by father ever taught me was that when those twice a year pay checks came in more than expected to aggressively be generous, save, invest and pay off debt. By paying off their mortgage anytime they got extra on those checks, they were able to survive and adjust their spending and lifestyle much easier when his industry took a turn for the worse and his income shrunk significantly.
Micromanage your savings
For people who have income that fluctuates (and sometimes doesn’t exist) managing your savings well is a great way to avoid debt, stress and not miss the opportunity to reach your financial goals and find financial freedom. There is a huge temptation when you get extra income above the minimum to spend it quickly. Sometimes this is important and needed but when it is planned out well, it often is used to better purposes.
For us this means that anything above our minimum is immediately put in to a specific savings account, nothing goes in to the big pot. We actually only have one savings account but I keep a Google doc with a breakdown of what every dollar in it is allocated for. It’s sort of like a zero based budget for our savings account. We have about 20 different categories in here that we save towards and this way, nothing ever just gets spent. Before we spend on anything, it goes in to this savings account and we have to be intentional about using it. If we didn’t do it this way, I’m pretty sure we would spend it on stuff and miss more opportunity to hit our bigger financial goals.
We are far from perfect on this and will not always make the right choices with the extra. It’s impossible to be perfect so give yourself grace . I say this to remind myself as I’m always beating myself up when I don’t save and spend like I intended to.
Don’t Give Up
Budgeting for people with irregular incomes is significantly more confusing and complicated than it is for the average family with regular paychecks. It is going to take time to figure out what works, a few months to get a grasp on what your income flow will be and it won’t be perfect from day one. If you are new to budgeting, be patient. It’s worth it to find what works and stick with it. Don’t get discouraged. As always in budgeting, have somebody outside of your marriage hold you accountable and be patient!
Please let me know if you have questions on this subject or how we manage our finances. I coach other families on budgeting and stewarding their resources well so I’ve seen many different kinds of income and budgets. I’m far from an expert but can let you know if I have any ideas.
In case you missed it:
- Creating and Sticking to a Budget: Do we really pay cash for everything?
- Creating and Sticking to a Budget: Our Story
- Creating and Sticking to a Budget: Gathering your information
- Creating and Sticking to a Budget: Our “Zero-Based Budget”
- Creating and Sticking to a Budget: Starting our Dave Ramsey Journey
- Creating and Sticking to a Budget: What we are Doing with our New-Found “Freedom” from Debt
- Creating and Sticking to a Budget: Managing your Savings