How to budget on an irregular or unpredictable income

Budgeting is especially challenging for people who have unpredictable or varying income. For example, if you’re a freelancer or a seasonal worker, it might be impossible to predict what you’ll earn from month to month. Those fluctuations can make budgeting feel like trying to hit a moving target.

As a financial educator and former NFCC-certified credit counselor, I’ve helped thousands of people build budgets, including many with irregular incomes. The key is building a budget that’s flexible enough to handle both good months and lean ones, so you can stay on top of your bills without sacrificing your long-term financial goals.

What is an irregular income?

If you have an irregular income, your income changes from month to month or from paycheck to paycheck. Unlike someone who earns a salary or has a fixed income, people with variable incomes can see their earnings change based on how many hours they work, how many sales they make, or other factors that fluctuate.

Here are some types of workers who typically have fluctuating income:

The main financial challenge for people with variable income is dealing with slow months. 

During good months, you might feel a sense of financial freedom, and you may even be tempted to overspend. But during slow months, you might feel like your finances are going to fall apart. If you don’t have a plan in place, you’re likely to make decisions that hurt your long-term finances, such as using credit cards to cover necessities or taking on buy now, pay later loans.

Read more: 6 best bank account features for freelancers

How to build a budget on a variable income

Step 1: Determine your essential monthly expenses

It’s important to understand the minimum amount of money you need to make each month to meet your financial obligations. Once you pinpoint that figure, you’ll be able to anticipate when you’re earning enough to cover bills, or if you need to find extra income.

To complete this step, I recommend reviewing your financial statements to identify all of your monthly expenses, and then entering them into a spreadsheet (or on a piece of paper) with two separate categories:

• Essentials: These are the costs you need to cover no matter what, such as housing, utilities, food, transportation (gas, car insurance, etc.), and medical care. It also includes minimum debt payments, taxes (for self-employed people), and other expenses that come up every few months, such as insurance premiums and vehicle registration. 

• Non-necessities: These are expenses you can forego if money is tight, such as dining out, travel, and shopping. 

Read more: Fixed vs. variable expenses: Key differences and how to budget for each

Step 2: Calculate your baseline income

A common mistake I’ve seen people with variable incomes make is budgeting for what they hope to earn, rather than what they actually earn. Instead of applying wishful thinking, I recommend being very conservative about what you expect to make, and then treating anything more as a bonus.

To do this, calculate how much you’ve taken home each month over the last six to 12 months. Then consider the slowest month to be your baseline income.

If you’re not sure how much you’ve been making, take a look at all of your sources of income, including income you deposited to a bank account and money you may have kept elsewhere. If you’re self-employed, you’ll need to make sure you subtract your business expenses and taxes.

If you truly can’t pinpoint your income information, it’s crucial to start tracking it right away. For example, for servers and bartenders, I recommend noting down the total tips you’ve received after each shift. That way, you can not only start tracking your earnings, but you can also start recognizing patterns, like which shifts or seasons are the slowest for you.

Read more: Gross vs. net income: Which one should you use when budgeting?

Step 3: Build a budget around your lowest income month

This next step is a lot simpler than it seems. No matter what your situation is, building a budget just means comparing two items: your income and your expenses. 

If you’ve already done the first two steps listed above, then you’ve done the hard part. Now you just need to compare your baseline income to your monthly essentials. 

First, look to see if your baseline income is enough to cover your essentials. If it’s not, then you need to make some adjustments. For example, you may need to look for a second job and start saving up for the lean months. 

If you make more than enough to cover essentials, that’s great news. Now, you need to decide which of your non-necessities you want to cover. If you don’t have money saved for emergencies, I highly recommend starting there. 

Step 4: Use your surplus to create an emergency fund

If you have varying or unpredictable income, it’s absolutely crucial to build an emergency savings fund. You can think of this fund as a sort of income replacement plan for your slow months.

How much money should you save? My recommendation for people with fluctuating income is to save six months’ worth of your monthly essential expenses. For example, if your essentials add up to $4,500 a month, the goal is to save $27,000.

When you have this amount in savings, you can move forward with confidence, knowing that you won’t have to struggle financially if you’re not earning money for a while. 

However, don’t be discouraged if it feels impossible to save that amount. If you’re just getting started with savings, focus on making it a habit to set some money aside each pay period. Then, you can celebrate smaller savings milestones, like saving enough to cover one month’s rent or enough for two months’ worth of essentials.

Step 5: Pay down debt 

If you have any high-interest debt — anything with 8% APR or higher — I recommend paying down your balances as soon as you have at least one month worth of your essential expenses in savings. 

Why? The interest rates on these debts can be real budget killers. For example, if you carry a balance of $5,000 on a credit card with 21% APR (that’s the current average rate), you’ll be charged roughly $87 a month in interest. Meanwhile, $5,000 sitting in a high-yield savings account will earn less than $20 per month. 

Additionally, you might want to look for help paying down the debt as quickly as possible. Depending on your situation, the best option could be taking out a debt consolidation loan, using a 0% APR balance-transfer credit card, or working with a nonprofit credit counselor to enroll in a debt management plan (DMP).

Best tools for managing irregular income

With the right tools, budgeting can be a lot easier. You don’t need to use anything complicated to create and track your budget, and you don’t need to pay for apps. Depending on your preferences, any of the following can help:

• A notes app or document where you can easily input your tips or other earnings after each shift.

• A spreadsheet where you can compare your income and expenses and easily adjust the numbers.

• Specialized budgeting apps, such as ServerLife or Goodbudget.

Common budgeting mistakes to avoid

In my experience working directly with clients on their budgets, I see a lot of people making the same mistakes. Here are some common mistakes that are easy to make when you’re managing variable income:

• Guessing about your income instead of tracking the numbers.

• Basing your budget on your highest-earning months.

• Not saving money during high-income months.

• Taking on personal debt to cover business expenses.

• Forgetting to save money for taxes.

The best advice I can give you for managing varying income is to have a plan for your money. That doesn’t mean you have to constantly evaluate every dollar you earn and every purchase you make. But it does mean you should have a clear idea of how much you’re earning, how much you need for essentials each month, and what you’ll do with any extra money you make.