If you have ever looked into how to make a budget, you’ll quickly find the calculations typically hinge on how much money you earn each month. But what if you don’t know how much you will make next month, let alone six months from now?
This kind of income uncertainty can create a wrinkle in the budgeting process for gig workers, seasonal employees, freelancers and commission-based workers. However, that does not mean they should skip budgeting altogether. Rather, those with irregular or unpredictable incomes just have to approach the budgeting process a bit differently than those with steady paychecks.
1. Plan around your worst month — not your best
If your income is high one month and low the next, you may think the best way to approach that from a budgeting perspective is to work based on the average amount you’re earning. But it’s actually “way better to start low than to start with an average,” said Ramsey Solutions, a personal finance blog. “If you budget low, you can always go up from there,” whereas if you end up “overestimating and then having to scale back later, that can put you in a real tight spot.” So find the month in which you earned the least, then build from there.
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2. Make sure every dollar you earn has a purpose
When figuring out how to budget with irregular income, “one of the most effective strategies is the zero-sum budget,” said Discover. With this budgeting method, you assign every dollar that hits your bank account a specific purpose, whether that is covering groceries, contributing to your retirement account or paying off student loans.
You can use the lowest-income figure that you determined in the prior step to set a baseline for assigning purposes. Using that amount, figure out how you will put every last dollar of your income to use. Then, if there is some extra one month, you can top off your savings.
3. Create a buffer with savings
An emergency fund becomes especially important if you do not have the reliability of a regular paycheck. If one month goes off the rails — maybe you lose your most important client or have a health issue — then your savings account is what will see you through. To keep steadily building up that balance, a “good strategy is to put at least a portion of every paycheck you get into savings,” said NerdWallet. And if you aren’t “making enough to do that, you may need to branch out.”
4. Remember to plan ahead for taxes
Many people who do not earn a paycheck from a traditional employer are responsible for paying their own taxes, rather than having them automatically deducted from their paycheck. The impact can be surprising, adding another element of unpredictability. But planning can help lessen the blow. “A good rule of thumb for commissioned and self-employed people is to set aside 25% to 33% of every payment for federal and state taxes,” stashing that in a separate account reserved exclusively for quarterly estimated tax payments, said U.S. News & World Report.
