Many people earn irregular incomes, which can make budgeting more challenging. But it doesn’t have to be. While budgeting is crucial when you aren’t sure what your income will be, there are ways to take the stress out of a fluctuating income.
Irregular income examples
Not everyone brings home the same paycheck every month. If you work in any of these types of jobs, your income may go up and down:
- Commissioned sales
- Freelancers
- Seasonal jobs
- Photographer
- Gig economy jobs (e.g., Uber, DoorDash)
- Construction
- Tourism jobs
- Jobs that often have a lot of overtime
- Jobs that rely on tips
Tips for budgeting on a fluctuating income
Determine Your Average Income
While your income will change, a key to budgeting success is to determine a reliable income on which to base your spending decisions.
Start by looking at your past income. You can do this by going through your bank statements, payment records, or tax return for the past year. Total everything up, and divide by 12 for your monthly average.
If you’re new at your job and don’t have enough history to find a reliable average, you may have to estimate on the low end for now, and then closely watch your income to fine-tune your average over time.
Once you know your average income, you can plug that amount into your budget. One method that works well for fluctuating income is the 50/30/20 budget, because of its simplicity. It divides your income across three basic budget categories: Needs (50%), Wants (30%), and Savings and Debt Repayment (20%).
Create an emergency fund
An emergency fund is essential for all budgeters, but it’s doubly important for those on irregular incomes. You never know when an emergency will strike, and if it hits in a down month, it’s a double whammy.
Experts recommend having three to six months of living expenses in an emergency fund. The exact number will depend on your unique situation.
Create a “buffer fund”
A “buffer fund” is where you’ll put your extra income when your income is high and pull from when your income is low. This is separate from your emergency fund. Your emergency fund is meant for unexpected expenses. The buffer fund is used to smooth out the highs and lows of your income.
Let’s say your income fluctuates between $5,000 and $8,000, and you’ve based your expenses on an average monthly income of $6,500.
When your income is above $6,500, any extra is moved into the buffer fund. When your income is below $6,500, you can pull from the buffer fund to increase your income to $6,500. You can keep this fund in a separate savings account or as a line item in your budget.
People often use credit cards for this purpose, borrowing during low months and paying it off when their income is higher. But this puts you in a cycle of constant debt, and interest can eat away at your earnings. A buffer fund breaks this cycle.
Understand your spending
Everyone who wants to make the most of their money should understand their spending. Using a budget tool like Lunch Money makes this easy. Set categories and goals in your budget and track your spending against your goals.
This will give you a good idea of your spending, which you can compare to your average income.
Reduce your expenses
If you realize your expenses exceed your average monthly income, it’s time to make some cuts. Some will be easy — maybe you don’t need that seventh streaming platform or the gym membership you never use.
But don’t think you have to cut out everything you enjoy! Love your morning coffee run? No problem. But take a hard look at spending that doesn’t bring you any happiness, or less happiness than being financially stable would get you.
A great way to do this is to rate each purchase on a scale from 1 -10. Your morning coffee might be a 10, but if it scores a five (going to lunch with your annoying coworker), it’s probably something you can let go if. If you’ve decided to cut anything under a seven, lunch with Janice is on the chopping block. (Sorry Janice!)
Find ways to increase your income
If you’ve cut everything you can and your expenses still exceed your average monthly income, you might have to consider increasing your income.
The best option will depend on your situation. Seasonal workers might take on a part-time job during the off-season. For example, growing up, I knew several teachers who worked at the local amusement park in the summer while school was on break.
If you have unpredictable, commission-based income, a side hustle with more predictable pay could help. Many of my friends have worked part-time jobs while they built up clientele for their sales jobs.
Bottom line
Budgeting with Lunch Money can help you understand precisely what you are earning and how you are spending your money. Figure out your average monthly income and ensure you spend less than you earn. Also, creating a buffer fund can smooth out the highs and lows of your income. This can help you break the cycle of relying on credit to get through.
