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How to Budget on an Irregular Income

If your income varies from month to month, here are some tips on how to build a budget that works for you.

The gig economy has changed the nature of work in our country. Approximately 16 million workers were hired on a temporary or contract basis in 2019 alone. It’s estimated that that number will grow in 2020, with some estimates stating that the percentage of U.S. employees participating in the gig economy will grow to 43%. As that number continues to grow, that means a large portion of our working people will be living on an irregular income.
An irregular income can make budgeting more difficult, because most traditional budgeting practices rely on making sure you’re spending doesn’t overtake your income. If you don’t have a set monthly income, what do you do? These steps will help you navigate the sea of irregular income.

1. Figure out what your baseline monthly expenses are

How much money do you need to cover your basic living expenses each month? That means the truly essential ones – ones you have to pay every month, no matter what. Common essential expenses include:
  • Housing and utilities
  • Food
  • Transportation
  • Loan payments
  • Medical bills or insurance
Your list can vary from the above, just make sure you think about your goals and priorities when you come up with your essentials. Once your list is complete, add up the total monthly cost of each expense – that’s your baseline. If one of your expenses is variable (like a grocery bill), tally their total cost for the year and divide by 12 to get an average.

2. Calculate the monthly average of your discretionary spending

These are things you spend money on but can live without. Look back at your previous bank statements to find out what you’re spending on average on these expenses monthly. Discretionary spending can include: 

  • Clothing, shoes, and accessories
  • Holiday and birthday dinners and gifts
  • Take-out meals and coffees
  • Gym memberships
  • Video games

Once you know how much you’re spending in this category, you can determine where it’s easy to make cuts in order to keep to your budget. Even slight adjustments can make a big difference!

3. Plan to save and build an emergency fund

When you have an irregular income, it’s even more important to prioritize building an emergency fund. An emergency fund is for big unexpected expenses, like if you get sick for a long time, lose your income, or you total your car. Ideally, this fund should cover six months’ worth of expenses, but not everyone can reach that goal realistically. Even if you can’t put a lot of money towards this, funding your savings as if it were a monthly bill is a great way to get started and will really show progress over time. Here are some tips on starting an emergency fund – even now.

4. Determine your average income

With an irregular income, the law of averages is your best friend. Some months are better than others. That’s why the best budgeting strategy is to live on your average monthly income. Simply determine your income for the year and divide by 12. Use this number as your “monthly” salary. 

5. Save the excess

When you do have a pleasant, unexpected excess (a tax refund, a pay raise, profit from selling items you’re not using, or $20 from Aunt Betty on your birthday), add it to your savings account and let it work for you. If you’re prioritizing paying down debt, this extra money can help you pay more than the minimum payment in a month, which helps get your principal down. The interest you’re paying on debt is likely higher than what you earn in savings, so paying extra towards debt will save you money in the long run. 

6. Try a zero-sum budget

By budgeting for expenses, savings, and an emergency fund, you can budget for every dollar, so at the end of the month, your balance is 0. Refine your numbers as you need to, but be sure to get started. If you come up short, look to your discretionary spending. You may not be able to knock this out of the park on your first month, but take it one month at a time. Remember, time flies and a month is only 4 weeks. You’ve got this!
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