Family Budgeting with an Irregular Income
By: Alicia Nelson-Bell, Finance Intern
September 28, 2021
In the finance world, rather than using the word “budgeting”, which often has a negative or restrictive connotation associated with it, we like to use the phrase “spending plan”, but we will use both throughout. Whichever phrase you prefer, ultimately this is a plan of how much money you are planning or expecting to come in and how much money you are planning to spend or save in different categories. The practice of creating a spending plan is one of the financial basics used to help your family take control of your financial situation and ultimately make money a tool to help you reach your goals in life.
If you are like the 42% of Americans that recently reported not feeling comfortable creating a budget for their family, you probably find budgeting even harder if you work an hourly, commission based or side jobs that cause you to have a fluctuating income. Throwing fluctuating income into the mix of finances that may already be difficult to handle may make it seem impossible to truly have a realistic spending plan each month because you don’t know exactly how much money is going to be coming in. The good news is budgeting with a varying income is possible! Continue reading for some basics that can help make it a little more manageable. Like everything with personal finance, budgeting is also just that, personal, so some of these tips may be more helpful for your family than others.
Keep the “Why” in Mind and be on the same page
It is important with budgeting, but especially with an irregular income, that everyone in the family is on the same page and knows the “why “behind your spending plan. For this to happen, first establish goals that you want to achieve personally or as a whole family, to remind and motivate family members to stay the course- especially when other needs or wants try to divert you from your goal. Ask yourselves if the sacrifice is still worth it and then move forward or reevaluate the goal. Remember that the things that are worthwhile usually aren’t easy and they take some sacrifice. This will be helpful with the other tips we talk about.
Determine your average income and average expenses:
There are a couple of different ways experts say you can go about budgeting with an irregular income:
- Base the income for your budget off your lowest in the last 6 months or year, so you are planning for the worst-case scenario or
- You can base it off your average income for the last 6 months or year.
If you choose to base the income used in your budget off your average income you’ll plan out your spending according to that amount of money coming in and when you have a month that is higher paying you can then put the “extra” into a separate savings account for you to draw on to get you to your average income when you have a lower paying month. Many people find it helpful to keep themselves from stealing from this fund for splurges, if they have this money in an account at a separate bank so that it is a little harder to access when it isn’t actually needed. Take some time to also reflect on your spending for at least the last couple months to find what you average spending in different categories. This can be helpful so that you are planning realistic amounts for each category and are aware of exactly where changes need to be made to fit within your average income. This can also help you have a clear picture of which expenses can fit in the average monthly budget and which ones can’t, which we will be addressing further in a later tip.
Use a Zero-Based Budget:
Using a Zero-based budget is our next tip to help with budgeting with an irregular income. Essentially your income and your expenses should be equal and every dollar should have a specific purpose. This includes treating your savings goals as expenses and having a personal allowance. When every dollar has a specific purpose, it is harder to overspend on wants that don’t matter as much.
Prioritize the most important expenses:
As personal finance consultant and author Dave Ramsey said, “Budgeting with an irregular income comes down to prioritizing your spending with the portion of your income that is unpredictable.” Especially when you are just getting started budgeting with an irregular income and don’t have a buffer built up for the lower months, it is important to prioritize your spending. It is important to make sure that your needs are being met before your wants. The top priority should be to ensure that you have a plan in place for how you are going to take care of the essentials, namely: shelter (rent or mortgage), utilities, food and transportation. Your plan can then expand to include taking care of any other needs such as savings, phone service and insurance.
Lastly, consider how much you would need for wants and take care of any of those that your budget may allow for, realizing some wants may need to wait until next month. This is where you may need to sacrifice some of the things that you enjoy in life but don’t necessarily need, so that you can be successful during the lower months without having to put them on credit, especially as you are building up your buffer for the lower months. Keep in mind that any sacrifices your family makes to keep in line with your spending plan, don’t have to last forever.
In Conclusion:
As you begin applying the above tips, you will find yourself gaining more control of your financial situation, make money a tool to help you achieve your goals and bring you greater peace of mind. Remember to give yourself and your family some grace and keep in mind that good things take time and it will take time for you to successfully practice budgeting with a fluctuating income, but with consistent effort it will get better with time. If you would like to learn more practical budgeting tips, join the Empowering Financial Wellness team at www.finance.usu.edu/efw for free webinars and other resources with more tips and tricks.
References:
Cruz, Rachel, The Rachel Cruz Show, How to Budget With an Irregular Income, Youtube, Jan 16, 2020 Retrieved July 5, 2021
Discover- Modern Money, 4 Tricks for Budgeting on a Fluctuating Income, 2021 Retrieved July 7, 2021. https://www.discover.com/online-banking/banking-topics/4-tricks-for-budgeting-on-a-fluctuating-income/
Peck, Anna Why Budgeting is Important: 5 Advantages of a Budget, Sep 17, 2020. Clutch Accounting Report
Ramsey Dave, The Ramsey Show, How Do I Budget With an Irregular Income, Youtube, October 4, 2019 Retrieved July 3, 2021