Inconsistent Income Series: Building a Budget

Over the last few months, we’ve been discussing financial dilemmas that people who have inconsistent income face. So far in our inconsistent income series we’ve covered how to build a savings strategy, setting financial goals, and what to do about debt. Today, we’re getting back to basics and reviewing something that many people struggle with: building a budget.

When you have a “lumpy” income, it can feel difficult to build a budget that you can stick to with any sense of consistency. As your income jumps up and down from month to month, budgeting for anything beyond your basic expenses feels tough to do. You might feel frustrated or trapped by the inability to predict how much cash flow you’ll have in a given period of time.

Often, people who are dealing with lumpy income, end up overspending on months when their income is “up” to make up for their stringent lack of spending when income is “down.” As a result, they struggle to meet their big-picture financial goals like paying off debt or growing their nest egg. Luckily, there’s a few things you can do to successfully set up a budget that you can stick to - even with inconsistent income!

Know Your Necessary Expenses

Your first step when building a budget when your income is inconsistent is to know your baseline expenses. These are all of the expenses each month that are absolutely necessary for you to continue your life as it currently stands. This list could include:

Housing - rent or a mortgage payment, utilities, home repairs, property taxes
Food
Transportation - whatever method of transportation you take to get to work should be included here
Debt repayment - the minimum amount you can pay on each of your debts
Ongoing medical expenses - this should be both for you and your children

If you have anything else you absolutely need to include here, feel free to do so. Next, you’ll set your long-term financial goals, like building an emergency savings, contributing to your retirement fund, or paying down debt. Make sure your goals are reasonable without completely ignoring them while building your budget.

From there, incorporate any unnecessary expenses that tend to recur. This might include:

Expenses for any sports or extracurriculars your kids are enrolled in
Holiday gift giving
Date night
Time out or events with friends or family

The point of understanding your necessary expenses is to build a budget around this “baseline.” Your baseline should be fully covered by the income you receive on months when your inconsistent income is lowest. If your baseline expenses are more than your income on your lowest-income month, you may need to adjust to remove some of your unnecessary expenses.

Have a Plan for Excess

You’ve built your budget around your lowest-income months. So what do you do when you have a really good month, and bring home a significant amount more than your baseline budget allotted for? Having a plan for any excess cash flow can help you to reach your financial goals more quickly and avoid overspending on things that you don’t want or need.

Your first goal with excess funds should be to build a buffer, or emergency account, in case a worst-case-scenario happens and you’re stuck with a large bill on a “down” month. After that, you can focus on continuing to save toward other goals, or put excess funds toward debt repayment. Finally, you might consider sectioning off any excess funds to put toward big-ticket items or experiences that don’t fit in your everyday budget like a family trip, or a new-to-you vehicle.

Build a Buffer

As you work to stick to your baseline budget, and are using excess funds on high-income months toward specific financial goals, you’re going to find that things don’t always go according to plan. There may be unexpected medical expenses, a bigger-than-average car repair, or a trip to the veterinary clinic that you didn’t see coming. In these cases, having an emergency savings or a buffer account in place to guard you against these unexpected expenses can be helpful. You want to sidestep going into debt if you run into an expense that’s unbudgeted for on a “down” month, and a buffer account can help you accomplish that.

Don’t Give Up

Remember to give yourself some grace as you start on your budgeting journey. There will be months where you end up overspending, or when you fall short with one of your saving or debt repayment goals. If you fall off the budgeting bandwagon, don’t give up. Nobody is perfect. The important thing is that you keep trying, and adjust as you go.