Having a budget is extremely important, but how can you be a pro at budgeting irregular income? You could have an irregular income for a number of reasons – perhaps you are self employed, your role is commission based or you get extra money with overtime and commission. Whatever the reason, it can be a real challenge to budget when you are getting an irregular income. Some months can be extremely lean months, whereas other months you feel like going on a massive splurge because you have received a large pay packet.
I have had first hand experience of budgeting irregular income. Although our business is earning a nice amount of money every month (you can check out our online income reports to delve into that a bit more), cash flow has been an issue in the first 9 months of being self-employed. Some of the places we earn our money from don't pay out for up to 90 days, and if we weren't diligent with our budget then things could have been a lot worse. We are fortunate enough now to have built a reserve, so here are my tips for budgeting when you have an irregular income before you have a reserve in place.
Work out your monthly and annual expenses
Knowing your expenses is the first step that you need to take in order to budget for your irregular income. I started off using a free budget planner I found online, which prompted me to fill in expenses that I hadn't even considered. Not only did I include all our monthly expenses, but I also included annual spending such as Christmas, birthdays, car related costs and more. It was hard to be so honest about our spending. I didn't put in amounts that were based on what I would like the spending to be based on a frugal lifestyle, but rather, what they actually were.
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Pro tip: I then used this information to see where I could make savings; we switched energy supplier and moved our phones over to pay as you go to get the best deals.
Prioritise your expenses to come up with your surviving figure
Armed with my list of outgoings, I was able to prioritise them and come up with two figures. The first number was my “surviving” figure – the amount of money that I would need every month to ensure that my priorities were paid. The priorities were everything that absolutely had to get paid every month so that we could remain in our home and not have to pay any late payment fees. This included our rent, council tax and food. This was the minimum amount of money that we would need in our business bank account every single month.
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If your surviving figure is less than you have coming in, you know that you need to take action. It could be to cut back on your spending, look at boosting your income, building savings up in your better months or a combination of all three.
Then the second figure was our “ideal scenario” figure. This figure included the surviving figure and everything else – the monthly portion of annual costs, putting money into savings, any bills not included in the first amount and spending money for my husband and I.
Having a list of priority payments was great for so many reasons.
- As we neared the end of the month, if we didn't have the surviving figure in the business account then I knew to take action on this. It could be chasing invoices, turning around some work quickly or even doing a car boot sale to boost our funds.
- The final 3 to 10 things on the list of priorities…did we really need them? Were they an expense that we could justify and were they actually adding value to our lives?
- We knew who to pay first as money came in. If we missed a few months of putting money away for annual costs, we could see where to make these up.
Try to build up your reserve when budgeting irregular income
There are busy months and there are quiet months, so it is important to try to get a reserve of cash built. This has been the hardest part for us. Every month we only withdrew our “ideal scenario” amount, and yet we have been earning more than that amount every single month. Cash flow hasn't been fun whilst we have built up that reserve – it has taken 9 months! There are so many tips you can utilise for building up your reserve, and here's what we have done:
- Kept our spending on track. Despite our income increasing, we have not increased our spending or our budget. In fact, we have even made a few more cut backs.
- We don't dip into the business account. It can be tempting to dip into it for whatever reason – perhaps a meal out to celebrate that month's income or buying something nice for the business, but we have been really diligent not to do this.
- We have a set pay day every month, as though we were in a traditional job.
We have also kept our matched betting money away from the business account – it isn't a taxable income and we have been able to use this money to fund our holidays or treats.
Don't spend all the money when you get it
Pay day is great, isn't it? It should go without saying, but don't go on a pay day binge when you receive a big pay out. Seeing a healthy bank balance might instil a false sense of security and it is so easy to let your guard down and spend more than you usually would. Refer back to your priorities and ensure that they are all paid and then be careful with any surplus you have. With our joint bank account I have a savings account attached to it called “joint buffer”, which is where I put money every month to cover our annual expenses. If there happens to be a surplus in our joint account after all our bills has been paid, our regular savings accounts are up to date and we have taken our spending money out, then we will share this money between a few accounts. We split any surplus into our joint buffer, our other savings accounts and we usually put a little into our holiday savings.
Once you have built up your reserve then there is nothing to stop you enjoying treats on pay day – after all, you work hard. However, you want to ensure that you will still be able to pay your bills throughout the month.
Pro tip: learn how to budget.
Try only spending cash when you are budgeting irregular income
Using cash to buy groceries is one of the easiest ways for us to have a low spend money. At the start of the month I will withdraw our grocery and household budget in cash, and this means that overall I spend less! It helps me to become more disciplined with my spending – physically seeing the money go down makes me think twice about my purchases and it encourages me to meal plan or use what we currently have instead of buying more.
Regularly check in with your budget
I used to redo our budget every January – new year and a new start made it the ideal time. However, our spending could change a lot over the course of 12 months. A few subscriptions would increase their prices, or I switched to a new car that saves us £50 a month. I would suggest that you find what works for you – I now revise our budget every 3 months or you might want to consider doing it monthly. Doing so helps you to identify where costs have increased, as well as anything that you aren't getting great value from.
It has taken a lot of hard work to get to this stage, and we still use these tips to help with budgeting irregular income. If you have any other tips then I would love to hear them – simply leave a comment in the section below.