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How do you budget when you have irregular income?

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A friend wrote me this email wondering how I budget on an irregular income. I have some suggestions, but before I write them up on here, I wanted to throw the question out and see what people think. How do you budget for irregular income (e.g., if you’re a student, consultant, etc)?

How do you budget when you have a highly variable and semi- unpredictable income over time, due to significant amounts of contracting, short-term (summer) gigs, etc.?

My stipend is $x/month, but I not-infrequently make 1.5x, 2x, or 3x, often just for a week or a month, or for the summer, and even my stipend varies (by 50%) from year to year due to different combinations of support/fellowships. In short, I make “enough” money, but how/where/when is totally up in the air.

I get by without trying primarily because I’m frugal and focussed in my spending, and all my income goes directly into savings from which I mostly deduct fixed amounts monthly…

But it’s at best semi-planned and I still don’t always feel in control, particularly under extended periods of heavy deadlines and such when my ability to manage my life goes out the window, I totally lose touch with Quicken, and my spending even seems to increase due to much larger amounts of restaurant food (OMG NO TIME FOR GROCERIES!!1!).

The core problem is this: though my net savings cashflow is almost universally positive, I still pay major/one-time expenses directly out of savings (since that’s where all money goes aside from monthly rent, DRIP deposits, etc. that gets auto-deducted). In short, I’m half-way organized and the other half is just riding on the fact that I’m *generally* frugal and “relatively* well-off.

This is hard with such variable income since my innate pattern- matching skills no longer apply (“my savings is only up $2000 this month, something must be off or I must have spent too much” makes no sense when my savings should go up anywhere from $1000 to $7000, mid- month or any other time, depending which way the wind blew last Tuesday).

What do you suggest for budgeting on an irregular income?

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42 Comments on "How do you budget when you have irregular income?"

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Joshua Keezer
Joshua Keezer
9 years 7 months ago

My wife and I have a minimal amount that we know we are going to make. She makes at least $400 a week and I make at least $600 every other week. We budget on the minimal amount and either apply the extra to our savings or to paying off a particular loan. If we know one week will be lower than those amounts we will either pull the difference from our savings.

Jonathan Cisco
9 years 7 months ago

I can relate with you. I’m also a graduate student with a varied income.

Bottom line: If frugal, which you say you are, I recommend budgeting based off of the lower-end of your payscale. For example, if you make anywhere from 2000-6000 a month, budget based off of 2000. (or maybe higher than that if you need to). Doing this would allow you to add major cash to your savings, potentially.

You should feel proud. Not many students can say they have a positive cash flow! Good luck to you!

Kind Regards,
Jonathan Cisco

http://www.dreamingnz.com

Ari Friedman
9 years 7 months ago
I have two suggestions: -Use your high-interest account to buffer your income over time; use your money-losing-after-inflation traditional bank account to spend out of. E.g. have everything deposit into Emigrant/ING/HSBC/whatever, and have a scheduled transfer from the high interest account to your traditional bank account. That way you can see each month whether you have more or less *in that account*, which will give you an idea of your actual consumption. -Learn to love Quicken’s cash flow features. If you carefully exclude accounts/categories, you can make them actually reflect what’s going on. In particular, you want to be watching the… Read more »
Ben
Ben
9 years 7 months ago
No matter how much money you make, your budget should be how much you need to maintain yourself, the people who depend on you, and your livelihood. 1. Assess what you spend money on. 2. Budget according to what you need to live and work (food, insurance, rent, debt payments, paying yourself first, etc). 3. Maintain a buffer long enough to pay for #2 for 3-6 months. 4. Prioritize your other expenses (toys, vacation, education, etc). 5. When you have money beyond this buffer, plan how you will spend it according to your priorities. 6. Spend your money according to… Read more »
Kibrika
Kibrika
9 years 7 months ago

Heh. Haven’t got as far as planning yet, but since me too I always seem to acquire “enough”, I intend to take an average of the acquired and spent money over the previous 3 or so months and imagine that would be what I would get.
Really interrested in this one, since it’s really my situation as well (maby not that impressive differences from month to month, but still not stedy).

Eric
Eric
9 years 7 months ago

My wife and I started using Budget (www.snowmintcs.com) which handles irregular incomes. It’s a really cool program which uses the tried-and-true “envelope method” of handling your expenses. We’ve only been using it for a month but I definitely would recommend it. It takes some getting used to, but it’s definitely worth it!

Alex Boutet
Alex Boutet
9 years 7 months ago
I’m the full-time student, part-time worker type. Here’s what I do. For each month, I plan my mandatory expenses. Food, rent, car, would fall in that category, but I discovered that I had very few mandatory expenses, as I live with my parents. My mandatory expenses includes about 40$ gas a month, and 20$ for my cell phone. That’s for the mandatory expenses. Whenever I notice the need to buy something (new shoes, because the old one begins to wear out, for exemple), I put it on a to-buy list. This list is ordered by priority. I put the name… Read more »
laura
laura
9 years 7 months ago
As a novice freelancer, I’m in the same boat, so thanks for this question! My modus operandi has been so far to spend as little as humanly possible each month and hope I break even. So far I have, but it’s not been fun. I’m looking forward to a more reliable income…. hope it comes soon. From the comments I think your audience appreciates this type of question, Ramit– can you talk more about saving on a really low or variable income? I bet lots of us are recent graduates who are still trying to find their way in the… Read more »
baba
baba
9 years 7 months ago

Seems like Mary Hunt’s “Freedom” Account http://www.mdmproofing.com/iym/freedom.shtml would be an especially useful concept if you’re on an irregular income. The basic idea is to identify major irregular expenses and to subdivide a separate real-world account to save for those expenses, so they don’t sneak up on you.

MyNameIsMatt
9 years 7 months ago
As is pretty obvious from the comments already, know your minimum and have an emergency buffer. Whether you earn an irregular income or not, this should go without much saying. Otherwise, I’d say feel free in letting go of the control. You don’t have to have your life planned out years or even months if even weeks ahead. That’s the beauty of life, so enjoy the lack of control (through established forecasting/budgeting measures). The biggest question might be, “I want to buy a house, but how can I plan for saving for that if I just don’t know?” First of,… Read more »
Steve
Steve
9 years 7 months ago
The simple answer is savings! Live as cheap as you possibly can. If you are between the ages of 17 to 30, live like a student, even though u have a job. I read somewhere that in order to be rich in the future, live like a pauper for at least 6 years after graduating from college. I am in my 7th year living like shit, and am happy to say that I can sustain a family of 3 for about 7 years without any additional income. Yes, u read right…7 years! When I say live like shit, its not… Read more »
MyNameIsMatt
9 years 7 months ago
Addition onto my last comment. Your income doesn’t determine your budget. Your lifestyle determines your budget. Don’t plan your life based on what you earn, but based on what you need and want. Your income determines the probability of success of your chosen lifestyle. So it only seems natural to plan your life around your income, especially as we live in the constant “need more” society, but that would be wrong. Income has everything to do with options, and nothing to do with expenses. Confusing those two will invariably cause expenses to rise and income to seem out of your… Read more »
Poorer Than You
9 years 7 months ago

I myself have been looking into this problem for my boyfriend. He works in LA for the ever-wonderful entertainment industry, currently for reality shows. Every time they finish a season of a show (or just a pilot episode!) he has to look for new work, so his job turnover is ridiculous. Right now we’re just tracking his expenses and getting a calendar (old-school paper style!) so that he can get a visual of when all of this bills are due. I’m hoping that this will really help him, because I’m not sure what else I can do for him.

ritayan
ritayan
9 years 7 months ago
I guess too much is being writeen on how-to-save and everything these days. One thing which pays of in any situation is don’t make a hugely elaborate plan for anything. Life is full of surprises and planning too much makes you rigid and inflexible. So try the following: 1) Deduct the least you can save at the beginning of every month and make it a constant amount. 2) At the end of every month look at how much is left in your checking amount? 3) Put a cutoff on your checking account amount which you rebalance at the endo of… Read more »
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[…] decided to write this mostly because of this post at the great I Will Teach You To Be Rich called How do you budget when you have irregular income? The sum of the post is a reader asking Ramit how he should budget with his very irregular income. […]

Jesse
9 years 7 months ago
There’s no real reason that a person can’t have a reasonable budget with an irregular income. I’m a freelancer myself and have come upon a similar issue. Still, there’s always going to be a minimum. Always. Unless you go without work, which really can’t be planned, fixed income or no. Know what you can do with that minimum and, more importantly, what you need every month to survive and maintain yourself. After that, it’s just skimming off the top and putting it in savings/investments. The thing is, I think we attach a little too much weight to knowing *exactly* how… Read more »
Samuel Peery
9 years 7 months ago

I posted an article not long ago on this very topic. In fact it’s called Budgeting on a self-employed or irregular income.

It’s a very detailed step-by-step guide on budgeting on an irregular income. Some of the overall tips are to definitely have a short-term emergency fund, to use cash for categories that tend to be out of control, and using a “just-in-time” budget where you allocate only what you need until your next paycheck. I hope it’s useful.

LeRoy
LeRoy
9 years 7 months ago

I would plan in percentages that way despite fluctuations you will be continually saving a percentage of it. For example you could plan to save 15% in a high interest savings account ala ING Direct, and maybe an additional 5-10% of it in something riskier since you are I assume young enough to ride out flucations. Finally as others have mentioned you can utlize a income floor to base your spending on that way fluctuations generally higher than your minimum plans.

Dono
Dono
9 years 7 months ago

My name is Matt hit the problem nail squarely on the head — how do you buy a house on an irregular budget? My wife and I scrimped and saved and paid cash for our house. It wasn’t easy and I know we missed out on some of the tax advantages to having a mortgage, but I’ll tell you it feels great to be 38 and be able to say “Hey, we’ll never have to worry about a mortgage.”

Sri
Sri
9 years 7 months ago

Dono,

Good job on buying the house cash. Buying the house cash is still better than paying interest and any tax advantage.

Am i right?

Katie
Katie
9 years 7 months ago
I googled just this thing a few months ago, and found http://www.youneedabudget.com. This guy developed YNAB and YNAB Pro that operate on the principles of a) maintaining a buffer, b) budgeting LAST month’s income for the current month’s expenses, c) giving each and every dollar a job, d) put money aside for the unexpected, and e) don’t abandon your budget if you go overbudget one month (the program actually forces you to “pay yourself back” the following month by lowering your available money to budget, rather than forcing you to spend less in that particular category). I highly recommend the… Read more »
Carter Adler
9 years 7 months ago
I see several possible solutions: 1. Budget based on the lower, fixed portion of your income. All extra income goes into savings/investments. 2. Budget based on a longer period of time. An income that is irregular on a week to week basis, might be very predictable on a quarterly basis. 3. Figure out how much variability exists in your income, and build an appropriate extra amount into your cash reserve. 4. Rather than having your paycheck deposited directly into your checking account, you could deposit it into your buffer savings account, and then set up an automatic transfer from savings… Read more »
Dono
Dono
9 years 7 months ago

Sri,

I would say yes, avoiding a mortgage hanging over your head is well worth the effort and discipline it takes to save, even if, like us, it takes 10 years of saving. But it’s not easy. We drive a 7 year old car, for instance. And all our friends drive trendy cars …

And as many people have said, the key to saving is to not fritter away any windfall which comes your way.

By the way, this isn’t my brother-in-law Sri, is it? If so, hope you’re enjoying the snow up there!

rod
rod
9 years 7 months ago

I also use the excellent “You Need a Budget.” I have semi-irregular income and the program forces you to budget for this month on last month’s income once you have a one month in savings. It makes your income feel less irregular since you know in February how much you have to budget because you have already been paid in January. It uses a modified envelope system which I think is quite effective. Check it out at youneedabudget.com

Alex Gierus
9 years 7 months ago
Wow: Hustling your own gigs, regulary earning 2X your expenses, able to handle risks and huge uncertainty of income. Sounds like you are a successful quasi-entrepreneur … congrats. Why do you want to budget expenses? You do things to meet goals and if you’re already getting by fine without wasting time on budgets (i.e., you earn multiple times what you spend) then forget about it — don’t do all those “be as cheap as possible, save as much as possible” for no gain. If you want to save more money, earn more money, expand your lifestyle, etc then maybe a… Read more »
B-Rizzle-Dizzle
B-Rizzle-Dizzle
9 years 7 months ago
Firstly, OMG! “Large purchases come out of savings…” I thought that’s what savings was for, a cushion for emergencies. If you have to spend it, it won’t be savings. You are not pulling money out of a 401k, so don’t sweat it. I know I saved up for future large purchases, and called it savings. It does not sound like you have a budgeting problem if you are frugal and put money into a savings account. It seems like your losing touch with Quicken makes you feel like you have lost control of your finances, which is not the case.… Read more »
ispf
9 years 7 months ago
1. Make a list of all *necessary* expenses such as rent, groceries, utilities, car payment etc. (Leave out the fun stuff such as entertainment, hobbies, pub-hopping etc. for now. We will come back to it later.) 2. Find out the *minimum* amount you require for each category to sustain yourself. Add it all up. Let’s call this total, $A. 3. Determine what your lowest possible monthly income is. Let’s call this $B. 4. Is $A less than $B? If not, go back to step 2 and tweak it. (Eg., Do you need to move to a lower priced apartment? Do… Read more »
Dono
Dono
9 years 7 months ago
I keep coming back to this thread to see what others have posted because this is an issue my wife and I have dealt with for many years. I edit textbooks, and my wife teaches aerobics and yoga and used to be a professional dancer. Here’s what I think has worked for us for the past 15 years: 1. Be frugal whenever you can. You don’t need a new TV or car more frequently than every 7 years. Talk to me next year and I might amend that to every 8 years. 2. You don’t need software, but he or… Read more »
Devin
9 years 7 months ago

I try to always do a ‘necessity check’. Do I really need this? Do I really need to go out to eat tonight or can I make a sandwich? Do I really need a new pair of ski socks or can I wait a bit? This way I’m always living below my means.

Once something comes up that I really want then I can go see the health of my finances and quickly see if it’s something I can ‘treat’ myself to.

James
James
9 years 7 months ago

Occasionally, when all of my budgeting efforts have fallen short, I use a service called Obopay to get money, either in loan form or as an I.O.U. (and the service tracks running balances between friends). It’s a good way to fill in those monthly money-gaps.

Kayla
9 years 7 months ago
I also keep coming back to this post; I’ve been doing some consulting lately and am not sure how to set things up. I’m okay in the budget realm, and have set income up so that it all goes into a savings account, and I pay myself a regular “salary” that I then use just as I would if I were an employee of someone else. I like to keep my “personal” money seperate from “business” money so that my consulting is run just as a business would be – emergency money set aside for paying my salary on months… Read more »
Saymorre
9 years 7 months ago

This is such a great question. Thank you Ramit and everyone else. I keep checking back for everyone’s input.

Saymorre
9 years 7 months ago

Thank you Ramit and everyone else. I keep coming back for more info.

candice
9 years 7 months ago
>and my spending even seems to increase due to much larger amounts of restaurant food (OMG NO TIME FOR GROCERIES!!1!). One suggestion I have for this is keep a “sanity fund” item in the budget somewhere. One or two hundred dollars a month to be used (or not) on things like that. Take it out in cash and don’t worry about where it goes, and if there’s something left over, buy groceries out of it. It’s a line item on the budget, so it’s accountable, but not causing stress. Also, consultant people, make sure you take out money to give… Read more »
moom
9 years 7 months ago

I don’t budget.

splodge
splodge
9 years 7 months ago
>and my spending even seems to increase due to much larger amounts of restaurant food (OMG NO TIME FOR GROCERIES!!1!). The solution is the same as for managing your money: plan in advance. Invest in a small deep freeze. If you’re no cook, find a friend who is and who(for the right price) is willing to do a couple of pots of things which you can freeze in takeway food containers or freezer bags in one-meal portions. Or – find a source of commercial frozen meals that are palatable and healthy. They’re generally cheaper than restaurant meals and these days,… Read more »
soufulow
9 years 6 months ago

I’ve been working freelance for about two years, everytime the pay check comes in (which is in irregular order), i’ll cut 1/3 of it into my FD savings. the rest of 2/3 will be used to cover all the expenses (both personals and biz). when time is right, the money in the saving accounts will be transfered to appropriate investment vehicles.

I still goes overspent some time for now (expecially with credit card) but by doing this, its been the best in limiting myself to spend within my means.

Archie
Archie
9 years 6 months ago
I used to have an irregular income every so often, and the easiest 2 things to do are: 1. Come up with a list of at least estimates of your monthly payments. You WILL know beforehand approximately how much you expect to pay on utilities, rent, any credit card bills. Then factor in about $50 per week for groceries and $150 per month on utilities (upper-level estimates – in NYC, these are fairly valid!) – and so on. 2. Then take the lowest number you are likely to receive and run the above numbers against that. This should give you… Read more »
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[…] You To Be Rich” asked his readers about budgeting on an irregular income to his readers and here is what they had to […]

Wa-eazie
9 years 1 month ago
I’m 26 and recently joined the ranks of independent consultants after a stint as a consultant at a Silicon Valley software firm which gave me a good underlying skillset and social networking skills/contacts. Those of us who “go independent” know that the financial rewards can be great (I’ve personally seen an increase in income of 100% on an already high “employee” income). Unfortunatly, if you’re young, you may not have the safety net needed to weather a 4 month “dry spell”, so plan carefully! I’ve not really found that there is any great strategy for how to handle this problem… Read more »
Wael
9 years 1 month ago
Regarding splodge’s idea about paying a friend to cook some stuff that you can freeze for you… I wouldn’t introduce money into a friendship in such a way, the only thing worse is taking the food for free. (read: Buck-up, spend the 30 minutes, and cook yourself a good meal.) I was an all take-out guy (which meant gym time replaced cooking time) until I realised how many sites are out there with quick and easy to make dishes. http://search.bbc.co.uk/cgi-bin/search/results.pl?q=recipes+quick&scope=all&tab=all&recipe=all On top of this, many grocers offer free delivery for orders over a certain amount, and will commit to a… Read more »
Pooja
Pooja
7 years 11 months ago

Could you please tell me where I can find YOUR suggestions for the same Ramit?
I’m sure you have it somewhere but I can’t seem to find the post.
Thanks!

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