If you have irregular income and/or you are self-employed, you may think that creating a budget is difficult. The reality is, creating a budget based on irregular income can be relatively simple.
1. Due to the irregular nature of your income, you need a relatively substantial “emergency fund”. As the amount of income you receive each month fluctuates, you will need a source of funds for the “lean times”, and a place to stash excess funds during the “harvest times”. This emergency fund can be in your checking account, your savings account, or a money market account. You need to have easy access to the money in this fund.
2. Create a list of your monthly bills, listed from most important to least important. A sample list may look like this:
–Credit Card Payment
3. As you receive income during the month, allocate the needed amounts to the correct budget categories. Be sure that you allocate your “needs” before you allocate your “wants”.
4. Any extra money that you receive during the month can be put towards debt reduction and/or further padding of the emergency fund.
5. If you have “lean month”, use the money in your emergency fund to meet your needs. Then, when times get better, rebuild the emergency fund.
6. Over the longterm, build your emergency fund to the point that you have an entire month’s worth of income in savings. You can then create a “regular income” for yourself, withdrawing a month’s worth of income from your own savings account, and depositing your irregular income into your savings account. You’ll want to get to a point where your budget and your expenses are “evened out”, regardless of when you receive a paycheck.
For many people who have irregular incomes, life becomes “feast of famine”. Your longterm goal will be to remove the worry and frustration of dealing with irregular income, and replace those feelings with confidence and control. If you have an “emergency fund”, you can smooth our the rough patches, without having to borrow money.
Resources: YNAB Personal Budget