According to the latest Federal Reserve data, nearly a third of Americans live on irregular income
Living on an irregular income has been the reality for folks who work in hospitality, construction, and retail, and as the gig economy grows, it’s becoming a more widespread phenomenon. When your pay varies from month to month, building a household budget that works all year round can be challenging – but it’s not impossible. In this post, we’ll share seven simple tips for reliable budgeting with less-than-reliable income.
1. Define Your Baseline Income
The first step in budgeting with a variable income is to determine your worst-case scenario. Look back at the last 12 months and identify the month in which you made the least in take-home pay. You can use that figure as the foundation for your new budget (or the average of your lowest few months, if you had one bad month that was truly a fluke).
2. List Out Your Regular Expenses
These are the bills that arrive every month for things you can’t really live without – like your mortgage or rent, utilities, phone, car, and childcare. Add these up and compare the total to your baseline income (from step #1). If your baseline income exceeds your regular expenses, you’re off to a promising start.
3. Don’t Forget Taxes and Retirement
Typically, salaried employees have taxes and retirement savings automatically withheld from their paychecks – but that might not be your situation. If you’re self-employed (or are one of the four in 10 Americans with a side hustle), set aside at least a quarter of your income for taxes to avoid quarterly cash crunches. Consider automating this process so your tax funds are sent straight to a separate account as soon as you receive payments. Likewise, when it comes to retirement savings, it’s wise to “set it and forget it” before you start allocating your income to other wants and needs.
4. Track Your Total Spending
Once you have a handle on your recurring expenses and required savings, scrutinize all the money you spend over the course of a few months. This might range from the unexpected but vital (like a medical bill) to the enjoyable (like a concert ticket) to the truly pointless (like a subscription you’re not using). This process should reveal a few areas you can cut back on – and it will also guide your savings strategy.
5. Build Up Your Savings
So far, we’ve just talked about your lean months – but what about those gladdening months when you make a little more than usual? Whether they’re seasonal or serendipitous, your extra gains should go right into a dedicated, interest-bearing savings account. Most experts suggest that salaried employees should keep three to six months of expenses in an emergency fund – but freelancers should aim for nine That way, you’ll be ready to cover unplanned expenses, dry spells, or the occasional splurge.
6. Protect Your Credit
People with irregular income frequently struggle to maintain a solid credit profile. That’s because the most important credit score factor is your track record of making payments on time and in full – and income fluctuations don’t make that easy. But credit scores have a major impact on financing costs (and thus your monthly expenses), so it’s worth making timely loan and credit card payments a priority. You’re also entitled to one free credit report a year, and it’s smart to look it over for errors or signs of fraud.
7. Stay Disciplined but Flexible
If you ask finance experts what the key to effective household budgeting is, many of them will say, “consistency.” But that might not be the most apt term for your particular financial picture. Once you use these insights to build a budget, you’ll need to regularly revisit it to see what’s working well and what needs to be tweaked to keep your goals on track.
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The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.