Irregular Income Budgeting
This playbook outlines the steps to create a budget tailored for individuals with an irregular income. It will guide you through calculating your baseline expenses, preparing for fluctuations, and adjusting your budget as needed to manage finances with a variable cash flow.
Step 1: Calculate Baseline
Determine your baseline income, which is the minimum amount you earn in a given period. Review your income from the past 12 months, pick the month with the lowest income, and use that figure as your baseline for budgeting.
Step 2: List Expenses
Create a list of your monthly expenses. Categorize them into fixed expenses (rent, car payments) and variable expenses (entertainment, dining out). Prioritize essential expenses to ensure coverage with your baseline income.
Step 3: Create Buffer
Establish a financial buffer by setting aside money in good months with higher income. This buffer will cushion the impact during months when your income is lower than your baseline.
Step 4: Adjust Spending
When your income is above the baseline, allocate extra funds to non-essential expenses or savings. If your income falls below the baseline, limit spending to essential expenses only.
Step 5: Periodic Review
Regularly review your budget every few months. Assess your income patterns, make adjustments to your expense list, and update your financial buffer accordingly to adapt to any changes in your income situation.
Step 6: Save Windfalls
Deposit any unexpected windfalls (bonuses, gifts, tax refunds) into your savings or buffer. This can fortify your financial position for future income fluctuations.
General Notes
Expense Tracking
Utilize budget tracking apps or spreadsheets to monitor and control your spending throughout the month.
Income Averaging
Consider using an income averaging strategy if your income fluctuations are predictable throughout the year to smoothen the income curve for easier budgeting.