Budgeting When Your Income is Inconsistent

One of the most common excuses I get for people who tell me they “can’t budget” is that their income varies from month to month.  Sometimes I hear it from someone who gets paid hourly and sometimes works overtime.  Sometimes I hear it from someone who is a commissioned salesperson.

Sometimes I hear it from someone who owns their own business and gets paid based on business profits.  These are three extremely different situations, but the approach to budgeting is actually pretty similar.  Let’s break it down.  Before we do, though, let me say one thing about those who are self-employed or partially-self-employed.

You must keep your business and your household finances separate.  Even if every penny you earn comes from your small business and you are the only employee, keep good records and keep things separate.  As you pay yourself a salary, make record of this.  This good recordkeeping is the only way you’ll truly know how your business is performing and allow you to make a household budget.

1. Capture all your income.  Since your income varies, look back over the past 6-12 months and see what income you’ve been able to make and then explain it.  Look for trends that you can use to forecast your future income.  You do this in your business – do this in your personal life as well.  Set a baseline amount that you can be reasonably assured you’ll bring in each month by using the low end of your forecasted income. 
2. Capture all your expenses (remember, household only – not business).  Once you’ve done this, you can look at the math and see if your forecasted income will cover your expected expenses.
3. Make an Emergency Fund a HUGE Priority.  Especially when you don’t have a steady paycheck, it is critical to have some money set aside for when you have a slow month in the business or lose a bunch of hours at work.  During good times, set money aside to build up that fund.  During lean times, cut expenses as much as possible and dig into that fund only as needed to stay afloat.
4. Be Diligent in Your Recordkeeping. Imagine you will be audited next week.  If you can explain to someone where money is flowing into and through your household and prove it, you’re on the right track.  You can’t be sloppy with your business finances and expect to make it.  Don’t try it with your personal finances either.
5. Update Your Forecasted Income/Expenses Each Month. Again, this comes straight from the practices that should be in place for your business.  Every month’s budget should look different.  My gift budget for December looks way different than the gift budget for January.  Wonder why? Hmmmm….
6. If the Math Doesn’t Work this Month, Prioritize.  There may be months (especially as you implement this and haven’t yet built up a good emergency fund) that you won’t be able to pay every bill.  In that case, prioritize.  If you are sure your income will bounce back and are just having a rough month or two, pick the bills you must pay, then work out payment arrangements with the rest.

As you can probably tell by now, the process is pretty similar to someone who is on a fixed salary with one big exception – more detailed planning is required.  Don’t get in too big a rush and don’t expect your budget to work for the first few months.  But don’t give up!  I’ve never talked with someone who figured out how to do their budget who said it wasn’t worth it!