How to Budget With Inconsistent Income
January 11, 2023
Budgeting is an important part of your personal finances. It lets you plan ahead, be more aware of spending, and continue making progress toward your financial goals.
Typically, budgeting starts by considering your monthly income, then figuring out how much you can spend from there. But what happens if your income isn’t the same every month? In this guide, we’ll discuss how to budget with inconsistent income and keep your finances on track.
Budgeting involves planning out your spending for the month ahead. It typically starts with your monthly income, then lays out all your required spending (rent, groceries, etc.) before moving onto optional expense categories like entertainment.
Budgeting is a useful tool for success in your personal finances. It can be used to help you save more money, or simply to be more aware of where exactly your money is going. It can also be beneficial for specific goals, like paying off credit card debt.
You can start a budget the old-fashioned way, using pen and paper — or you can utilize various budgeting apps. For more details, follow this step-by-step guide to budgeting.
How to Budget With Inconsistent Income
The first step of budgeting is typically to figure out how much you have available to spend each month. If your income is variable, here’s how to get started.
Estimate Your Average Monthly Income
First, figure out how much you expect to earn in a typical month. This will be a useful starting point for your budgeting strategy. To do this, you can look at your income for the last 6+ months, and then find the average. To find the average, simply add up the monthly totals from the previous 6 months, then divide by 6.
Alternatively, you could opt to use your tax returns from the previous year to estimate your income. Tax returns consider income on an annual basis, so all you’d need to do is divide your total income on your tax return by 12 to find your average monthly income.
Before moving on, there are three important things to consider here:
- Has your situation changed? If so, it might be more useful to make an educated guess on your future income, rather than using previous income records.
- How often do you get paid? If you are paid infrequently in larger installments, you might need to rely more on long-term averages.
- Is your income pre-tax or post-tax? If you are paid by an employer, taxes will likely already be taken out of your paycheck. But if you’re self-employed or run a business, you’ll have to budget for taxes on your own.
Build Up Your Savings
If you can’t necessarily rely on a steady income, it’s very important to build up savings when you have the chance to. This often means committing to saving more when you have a higher income for a period of time. It’s often tempting to base your budget around the amount of money you have available immediately. But it’s wise to look ahead and prepare for potentially leaner times, when you may have to rely on savings.
Plus, you likely have things that you are saving up for in the future, or expenses that you’ll know you’ll face soon. It’s wise to build up your savings during higher income periods.
Prepay Certain Expenses
Another approach could be to prepay for certain expenses when you’re able to. This is another way to utilize higher income months to prepare for leaner times. In some cases, prepaying can even score you a discount compared to paying monthly!
The point of prepaying is to reduce your future monthly expenses, which makes budgeting with inconsistent income easier. Some examples of expenses that you might be able to prepay include:
- Insurance (for example: health, auto, home)
- Certain bills and subscriptions (for example: cell service, internet)
- Memberships (for example: gym, services such as lawn care)
Use Budgeting Software
With a typical fixed-income budget, a pen and paper approach is often sufficient for budgeting. But when your income is inconsistent, using software can really help. There are options like You Need a Budget (YNAB) that make it much easier to plan ahead, as you can budget for multiple months at the same time.
These apps also only let you budget money that you actually have in the bank. This saves you from spending money that’s not in your budget (by using a credit card).
Clearly Distinguish Discretionary Spending Categories
There are essentially two types of spending: Needs and wants. Needs cover your essentials — rent, utilities, groceries, etc., while wants are more optional categories like restaurants and entertainment.
From a budgeting perspective, it’s always important to distinguish wants from needs. However, it’s even more important when your income is variable.
Why? Because you should always prioritize needs and ensure you have enough in your budget to meet required expenses — even in months when your income is low. It might be that you need to cut back on optional expenses during leaner times, and that’s okay! Getting clear on exactly what spending categories are truly optional is an important first step.
And during higher income months, it’s a great idea to budget for some happy spends. Whether that’s a nice meal out, a massage, or an optional purchase for yourself, it’s completely okay to reward yourself when you can afford to do so!
Track Your Expenses
It’s always important to track expenses when budgeting. This helps ensure that your planned spending aligns with your actual spending, and shows where you might need to make some tweaks. And tracking is particularly important for those with variable income, as there’s often less wiggle room.
To track expenses, you can either use budgeting software or track things manually by reviewing your bank and credit card statements. Try to check in at least twice a month.
Another option is to simply use cash, and tracking spending using pen and paper. This can be particularly helpful during leaner months, when you really can’t afford to overspend.
Will Budgeting Work if You Have an Irregular Income?
Budgeting can absolutely work with irregular income. In fact, budgeting may be even more effective — and more important — than it is with a fixed income.
With that said, there are certain tweaks that must be made in order to improve your success with budgeting on a variable income. Building up a bigger balance in your savings account is perhaps the most important, as it gives you more flexibility to adapt to lower-income months.
Want to learn more about money, budgeting, debt management, and more? Browse the Happy Money blog for insights on all things personal finance.