How to Budget for an Irregular Income

I’ve been a full-time professional blogger for more than two years now. It’s been a fantastic experience, a sort of dream come true. But blogging for dollars isn’t without drawbacks. For one thing, the income is irregular. One month you might have record earnings — and the next you might experience your own personal financial crisis.

Bloggers aren’t the only folks who struggle with the fluctuating incomes, of course. Many freelancers face the same issue, as do those whose pay is tied to commission. Creating a budget when your income fluctuates can be a frustrating experience. I’m sure that each of us finds our own ways to cope. Today, I want to share the method that I’ve developed.

Projecting income

Most articles I’ve read on this subject suggest basing your budget on your average monthly income from the past twelve (or six or three) months, but I don’t recommend that unless your income has wild swings — $12,000 one month and $0 the next.

As the past 18 months have demonstrated, incomes can and do decline. A prolonged decline wreaks havoc with the “average income” budgeting method. When I project my cash flow, I base it on my minimum monthly income from the past twelve months. Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital.

Note: If your income is variable, but you know that you’ll always make at least $X,XXX, then it makes sense to base your budget on $X,XXX. Anything you earn above this amount is gravy.

When I project my cash flow, I base it on my minimum monthly income from the past twelve months.

A hypothetical example

For the sake of illustration, I’ve constructed a hypothetical example of the monthly income a freelance designer might have earned in 2008. View hypothetical 2008 income chart.

The “actual” column shows the designer’s actual income by month. The “average” column shows the average for the entire year. Using the standard advice, this designer would then construct her 2009 budget based on the average monthly income from 2008. Her 2009 budget would be $3891.67 per month. But what if her income declined in 2009, as happened to many freelancers? View hypothetical 2009 income chart.

In this instance, the designer’s average monthly income for 2009 was $3600, or nearly $300 less than she budgeted. And because her first few months were fantastic, she might have been tempted to splurge beyond her budget. That would have been a mistake. If, instead, she had constructed a budget based on her lowest month in 2008, she would have done okay. View irregular income chart.

Now, obviously I’ve fabricated these numbers out of thin air in order to make a point. But based on recent conversations with a variety of people who earn irregular income (bloggers, designers, contractors, entrepreneurs), many folks faced this sort of situation in 2009. Their incomes dropped, and their budgets weren’t ready to cope.

Building a budget

Projecting cash flow is only part of the battle. After finding a basis for my budget, I followed a simple system to manage my money. I recommend using two different bank accounts to make this work: 

  • The first is your “business” account (without quotes for those of you who actually own businesses), which is where you deposit all of your income. My business account is a high-yield savings account with ING Direct (You might use FNBO Direct or some other bank. Just choose a savings account with a high interest rate.)
  • The second is your personal account, and it’s from this that you’ll pay your ongoing expenses. There’s no need to open a new account if you already have one that will work. I just use my existing credit union checking account.

Every month as you earn income, receive it (and leave it) in your business account. This is where you accumulate your cash. Because it’s in a high-yield savings account, it earns interest as it waits for you to use it. From this money, pay yourself as if you were an employee. Your monthly salary is whatever you calculated as your monthly budget, your minimum monthly income from the past twelve months.

At “I’ve Paid for This Twice Already,” PT writes that “the key to budgeting with irregular income [is to] make it mimic regular income as much as possible.” I agree. On a set date each month, write yourself a paycheck. Leave the rest of the money in your business account. (Here’s more on the “virtual employer” concept.) At the end of each year, three things happen.

  • First, you reset your salary. Based on the previous year’s numbers, your income might increase — or it might decrease.
  • Next, you use the “extra” money you’ve been accumulating in your business account to pay taxes. I could write an entire article on budgeting for taxes with an irregular income, but for now let’s just note that it’s very important that you remember to account for them, especially if nobody else is withholding them from your paycheck.
  • Finally, if you have anything left after paying taxes, you pull this money out of the business account as personal income. It is, in essence, a year-end bonus. You can use it for whatever you see fit: debt reduction, long-term savings, a Mini Cooper.

In first glance, this system may seem complex. It’s not. It’s actually very easy. To summarize: I base my budget on my lowest monthly income from the previous year. When money comes in, it sits in a bank account. Each month, I write myself a paycheck based on my budgeted amount. The rest of the money is saved to pay taxes. If there’s any left over at the end of the year, I get a bonus.

Note: The first year is difficult. You generally don’t have the ability to base your budget on averages or on the lowest income from the last twelve months. (I was able to do this because I’d been earning money before I quit to blog full-time.) Instead, you’ll have to use some other method to project your income. Whatever you do, remember: It’s easier to deal with a budget surplus than it is to deal with a budget deficit!

Tips and tricks

There are few other things that make living with an irregular income go more smoothly. The following tips and tricks build on the core personal finance
skills I discuss often at Get Rich Slowly:

  • Establish a foundation of thrift. The number one thing that helped me cope with an irregular income was adopting a lifestyle of thrift. I took steps to slash my spending. I decreased my recurring monthly expenses. I found cheap or free alternatives to the things I used to spend money on (Hulu instead of cable television, the public library instead of the bookstore, etc.).
  • Prioritize spending. Many of the budgeting guides I’ve read suggest creating a list of prioritized expenses. Financial guru Dave Ramsey, for example, recommends listing all of your expenses in order of importance. (“Importance, not urgency,” he says.) When you get paid, start at the top of the list and work  own. This is an excellent method for those who are struggling to make ends meet.
  • Build a buffer of savings. Before I quit my “real” job to become a full-time blogger, I began to set aside a large sum of money as an emergency fund. I figured that if my income dropped below the minimum I needed to get by, I could tap the emergency fund to provide supplemental cash. With luck, I’d be able to ride out any rocky storms. (I’ve been fortunate to not have to do this.) When you have an irregular income, the bigger your emergency savings, the better.
  • Tap your business account only as needed. As money accumulates in your business account, you’ll be tempted to draw from this pool for fun and games. Don’t do it. Remind yourself that this money is for taxes — and for your monthly salary.
  • Resist lifestyle inflation — especially during the good months. Lynnae at Being Frugal writes: “One of the biggest downfalls of having a variable income is the tendency to overspend on good months. Believe me, I understand. Your money is stretched to the limits in the lean months, so on a good month, you’re  empted to spend a little bit more on fun stuff. But when the next lean month comes, there’s no extra money left to help ride it out.”
  • If possible, live off just one income. If you have an irregular income but you have a partner who makes steady money, explore the possibility of living solely on her income. Use your partner’s money to meet the necessities, and use yours to pay for savings and extras. This isn’t an option for most people, but if you can manage it, it’s a great way to budget.

Do you have irregular income? If so, how do you budget for the fluctuations? Can you offer any additional tips? I’m especially interested in tips for those who are just getting started with self-employment or variable incomes.

More insights on: Money, Perseverance

J.D. Roth

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J.D. Roth is the founder of "Get Rich Slowly," and is the author of "Your Money: The Missing Manual."
load comments (34)
  • cook

    a very well written article…………

  • YM

    Can you clarify if this is live contracts or actual received cash? I find that cash flow is very hard to predict, even leaving some months dramatically bare of incoming cash flow. Often, a client will sign on, send a deposit and start the project, but the project urgency tapers off and the project languishes unfinished for few months. The balance payment doesn’t come in when expected. (Maybe you’ll have an article on how to deal with that one.)

    This makes your minimum income model unrealistic for businesses that deal with this situation.

    Would you then consider my income to ‘swing wildly’? I guess so, it seems.

    Great article, though.

  • Karl

    I wish I had seen something like this last year when I was running my own business! Great advice!

  • Joel Runyon | [BIT]

    Once again, great stuff from JD. Well Done.

  • Andy

    Hey JD

    Thanks for the great article

    I actually just went through my freelance design earnings for the first time yesterday and couldn’t believe how different some months were compared too others without me even realizing it.

    The key for me is to have separate accounts and weekly/monthly reminders and checklists to make sure I am staying on top of payments and transfers.

  • Bill in Detroit

    JD … another well-written article. We are trained to consume so it is difficult to look at funds ‘sitting idle’ but readily accessible in a bank account. Once a proper reserve has been established (ala Dave Ramsey), for some it may be helpful to move a significant portion of their money to a less liquid investment vehicle.

  • J F Castro

    Thanks for this valuable post! If i would have read it a year ago i would have saved myself from a very hard year in the present, because i did all the contrary. So, i will translate this post to spanish and share it if you allow me to (linking to you of course), so it help many other colleagues that may be thinking in quiting their jobs to become freelancers, by encouraging them to revise their financial plans first.

  • JoAnn

    Very helpful! I just quit my full time job to go out on my own. I want to develop a graphic design business the right way and this helps. In particular the way to budget with the lowest monthly income and paying myself on a schedule.

    I planned on opening a separate account for my earnings and now it will be a high yield savings account. One good tip my CPA gave me was to take 30-36% of what ever I pay myself and put it away in a separate account for taxes (for instance if I pay myself $1000 then $360 has to go into the “tax” account. This will be necessary for me because I don’t trust myself with having that money together with any other money.

    Thanks again!

  • Rachelh

    which account do you recommend using for business expenses? Personal or business? I find it difficult to keep QuickBooks on two accounts that are both on extra-low for this first year of my business…I’m continually making owner’s draws from my bus. account, and depositing personal money into the bus. account to make the register even out. Advice?

  • Sachinpat

    I would add setting up a budget on Mint.com. It’s not a perfect personal financial management system, but it can really help you monitor and budget your spending without a lot manual data inputing. If you only have a few small financial accounts, then Mint works just fine.

  • Lady Biz Owner

    Excellent article – happy to note that I do most of these things already and it works out really well. A couple additional suggestions: 1 – look at your numbers regularly, at the _very_ least monthly, so you really know where you stand (your average over the past six months changes every single month). 2 – for the self-employed/future-mom-to-be ladies out there: that money you set aside in your biz savings account is not just for taxes, it’s for maternity leave. In the U.S. of A., nobody pays for your time off when you’re self-employed.

  • Katrina Jones

    The key for me is to have separate accounts, weekly and monthly reminders and checklists to make sure I stay on top of payments and transfers.
    http://www.whatisguide.net/031

  • Steve

    If you have the flexibility it is best to measure your unfettered spending flow then fine tune down the areas that you can live without. Importing your statement for tracking is the truest way to make a budget happen long term. My MS Money application no longer works so I searched and found a program called bank2budget (http://www.bank2budget.com). This program cuts my time down in paying bills and tracking expenditures by 90%. I spend about 1 hour a month and can show you trends and many other charts. It requires MS Access version 2002 or higher though. Good luck to us all.

  • Kaiser Villaviciencio

    Having an emergency saving is a good way for investing both for those who have a job and freelancers. It pays to have savings, so when a storm comes you always have something to pull out of your pocket. It’s very ideal to keep a budget. It isn’t so bad to go for product discounts, too. For me, keeping a 2-3 month stock of supplies in the house is a big help.

  • Jerry

    Steve,
    Thanks for the tip. I see what you are saying. You can talk all day about budgeting and saving but until you see the actual flow of your spending, there is no way you can start to consider saving.
    Jerry

  • Hannah Yu

    This article is being elaborated already about business like blogs. There are different ways to be paid and blogging is one of the jobs as freelancer. Being paid by your effort and labor is a happiness. This is great and for more related article click here.

  • checking account promotions

    Even for a 9 to 5 budgeting is tough.

  • Robert Perry

    Excellent article. I just quit my “real” job last month and am working for myself as a freelance graphic designer. I had been doing both jobs for four years, and it’s nice now to be able to focus on work that I control… and like. I’m so pleased to realize that I’m already budgeting in the way the article describes: for my minimum monthly income per month. I even have an ING savings account, like you, from which 2 days are needed to make withdrawals (an ample deterrent to impulse spending).

  • resume writing

    interesting! thanks!!

  • Dave

    Steve and all,  I too have an ING checking/saving account.  I used the Bank2Budget.com tool and it is amazing how I am able to see the flow of revenue and expenses this way.  Thanks for the tip!

  • dave ramsey

    To use debt elimination spreadsheet by Dave Ramsey, you have to first
    arrange your loans in order of ascending what we do in this snowball
    spreadsheet is that we input all our loans in smaller to higher order, put the
    amount we want to add to the current monthly repayment and the spreadsheet will
    give you the highest number of months it will take you to settle all your
    debts.

  • dave ramsey

    There was a man called Dave Ramsey, Dave Ramsey developed a spreadsheet or
    worksheet which any debtors can take to calculate the number of months it will
    take him to settle certain number of debt taking some factors into
    consideration.

  • dave ramsey

    There was a man called Dave Ramsey, Dave Ramsey developed a spreadsheet or
    worksheet which any debtors can take to calculate the number of months it will
    take him to settle certain number of debt taking some factors into
    consideration.

  • dave ramsey

    There was a man called Dave Ramsey, Dave Ramsey developed a spreadsheet or
    worksheet which any debtors can take to calculate the number of months it will
    take him to settle certain number of debt taking some factors into
    consideration.

  • dave ramsey

    There was a man called Dave Ramsey, Dave Ramsey developed a spreadsheet or
    worksheet which any debtors can take to calculate the number of months it will
    take him to settle certain number of debt taking some factors into
    consideration.

  • money saving expert

    I will learn a lot from you. Thank you for sharing. I also use money saving expert in searching money tips.

  • Mary Saviano

    No advice, but I’ve been running into the same problem and want to hear how others manage this.

  • Karen Chalmers

    Just thought I’d put a quick word in here.

    I’m an Accounting and Business Consultant working freelance for Small to Medium Sized Businesses.

    What I generally recommend for smaller clients is to have 2 Business Accounts; A General Business Cheque Account, and then a “Call” Account which is your High Interest.

    When $$ come in, put away your estimated amount of tax into the “Call” Account (I’m in New Zealand, so 31.2% covers Tax, ACC [accident compensation – we don’t do private law suits for accidents in NZ] and 12% Student Loan repayment.)

    Leave the remainder $$ in your business cheque account, and draw from that account your weekly / monthly “wage” and any business expenses.
    This ensures that you are not caught short at the end of the year for Tax payments. Tax should come first when you get $$ in, then paying yourself.

    I run this model myself, being as I only have 1 staff member and it makes things easy. If I get a surplus of cash over and above my minimum monthly running costs (myself included), then I transfer that surplus into the Call account as well.

    If you are regularly running out of money in your business account, then you are simply not making enough money for your costs. It is likely that your weekly / monthly wage drawing is too high for what you are earning. Either re-negotiate with yourself the amount you draw for you, or go out and find another client.

    Directors Drawings and Capital Deposits are not a bad thing,
    you are after all starting your own business. But if a business model is set up right, then it shouldnt be necessary except for the first 2 months of business. :)

    Side note: For my first 3 months in business I paid myself the bare minimum I needed weekly out of my backup savings. This allowed a little bit of capital to build up in my business accounts so that I wasnt caught short.

  • http://www.debtconsolidationcare.com/User/good.nelly Nelly Brown

    Resist lifestyle inflation— especially during the good months – This tip is the
    most important one. I had a friend with a variable income. His father buys the best things from the market on good months. He will buy whatever catches his fancy. He’ll go to pub and party every day. He just doesn’t bother to follow a financial regime.

    In the lean months, my friend’s family faces huge problems. My friend has to think thrice before buying anything from the market. His father stops going to pubs and tries out every other thing to save money.

  • Paul Darrow

    great great stuff. i have two accounts and i thinki was drifting towards something you discuss above but you have crystallized it perfectly and probably saved me a 6-12 months of trial and error (and tough months). I guess i am wondering what happens with business expenses? Do those come out of the business account?

  • Michael Sparks

    Hi yield savings is that a joke? I agree you need a pretty big emergency fund when you work for yourself but there is no safe place for your money. I’m in the same boat being a self employed entrepreneur. Now I’m looking into infinite banking where the safety is still there and the yields are much better.

  • Jo Harrison

    This is a great post, and even years later is still very relevant. I have managed my money since becoming self-employed 2 years ago, but it’s getting to the point (and recently after I became single again with only my income) that I don’t have any emergency fund… I am going to apply this to my income from now on! :)

  • Kimboleigh

    Very great ideas! This post is super helpful. Thanks for sharing.

  • Brian Barnes

    Useful thoughts, but I’ve been self-employed since 1987 and I’ve seen my income fluctuate from nearly 10,000 in one month to around 200 in another month, so your suggestion of using the lowest month earnings as a benchmark doesn’t work in practice. My advice is to keep 25 percent of everything you earn in your savings/tax account and then consider the remaining 75 percent as “yours” to do with as you need. It works for me. You can read other tips on my site at http://www.succeedingincorporates.co.uk

  • Andy Proctor

    Great thoughts. Perhaps two more, both maybe taking some work: first, the less debt you have, the easier it is to handle the lean months. Second, you suggest the leftover funds in the biz account go 1st toward taxes.I’d suggest you set these aside from the start (Quicken lets you do savings goals), so you’re prepared for tax day next year. ‘Course the IRS gently helps this effort as well, with estimated taxes.

  • Musician

    Can you get a bit more detailed about your business account? How do you manage a large purchase, such as a computer? Does it reduce your salary or come out of the “extra” you’ve got sitting in there? When I do a lot of work, I have a lot more expenses because travel is involved–I need additional income to cover the gas/food.

  • jdjagm

    We’ve been self-employed for a few years, but within the last 2 yrs, certain circumstances led to me leaving my career in restaurants to help with my husbands in the appliance industry. We work together 6 days a week which works well for us, but the 1 ‘shared’ income straps us. There is no’ back-up’ income….when our job is slow….we both are home, when we are busy, we both work…..with the inconsistant hours we have it was hard for me to keep a part time job in the mean time, and we can’t hire someone because of the inconsistency!!!!!! I do have an expense sheet, what we need each week, month, but hard to follow when you work one day and off two, or more!!!!!!!…………Stuck between a rock and……

  • PhilippaWillitts

    Late to this article but just wanted to comment to say how useful it was. I’ve been reading a lot of articles this morning about budgeting for freelancers and most of them were pretty much pointless. The idea of basing income / spending on the lowest earnings from the past 12 months makes a lot of sense to me, and reduces some of my fears about the fluctuation in my income. Thank you!

  • Aes

    anyone have an example spreadsheet? Dave Ramsey’s is a little too “not excel” for me.

  • Cara Li

    Saving money. Hmmmm.

    1. Try not to live paycheck to paycheck. Plan for life sucking at times.

    2. Try to have six months of budget saved up.

    3. If married, or have children, get life insurance.

    4. Try to enter into retirement debt free. You can save on things like gym (at Planet Fitness) and car insurance ($24/month at Insurance Panda). Try to cut back wherever.

    5. Look at your family medical history. Average out how long your ancestors lived. Add 5 years to that average. Is it 68? 75? 92?

    6. Now, plan to have what ever your budget is plus a 5% increase per year. If you have a 2k monthly budget now, that is 24k per year. Multiply that times an extra 5% per year. Finally, multiply that for how long you intend or think you will live. Me? My number is 144k (2kx12monthsx6years)(average family death=66 so I go to 71 (if I retire at 65).

    My number will rise with inflation.

    Now, this notion that we all need to save (or invest in 401’s) 1 or 1.5 million dollars is what the BANKS want you to do.

    7. What do I do with the rest of the money? LIVE LIFE TO THE FULLEST EVERYDAY YOU ARE ALIVE!!!!!!

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