How to Budget for an Irregular Paycheck

Budgeting can be tricky when your income fluctuates month to month. Unlike a steady paycheck, an irregular paycheck means your earnings go up and down, making it hard to plan expenses. But having a budget is even more important with a variable income, so you don’t overspend in the good times and run out of money in the lean times. The good news is, you can totally create a budget that works with irregular earnings. It just takes a bit more planning. Here’s how to do it.

Calculate Your Average Monthly Income

To start budgeting, you need a sense of what your typical monthly income looks like. So take a look back over the past 6 months or year, and calculate your average monthly pay. Add up all the income you received, then divide by the number of months. This gives you a baseline to work from in your budget.

Going forward, re-check your average every 3 months or so. That way you can adjust your budget if your income changes over time. If you’re just starting out freelancing or your income is on an upward trajectory, you may want to recalculate monthly.

List Your Fixed Expenses

Next up is nailing down your fixed expenses. These are the necessary costs that stay the same each month, like:

• Rent or mortgage
• Car payment
• Insurance premiums
• Loan payments
• Utilities
• Internet and cell phone
• Groceries
• Gas and transportation
• Childcare or eldercare

Make a comprehensive list so you know exactly what’s going out the door every month. Total up these fixed expenses so you know how much you absolutely must earn each month to cover the basics.

Estimate Variable Costs

In addition to fixed costs, you likely have some variable expenses that change month to month. These may include things like:

• Dining out
• Entertainment, hobbies, subscriptions
• Clothing and personal items
• Gifts and donations
• Home maintenance
• Medical copays and prescriptions
• Travel

Go back over the past 3-6 months of variable spending and calculate an average for each category. That gives you an estimate to plug into your budget.

Account for Periodic Expenses

Also factor in any periodic expenses that come up a few times a year, like:

• Car maintenance and registration
• Home and appliance repairs
• Vet visits
• Property taxes
• Insurance deductibles
• Gifts and holiday expenses
• Vacations

Take your total annual projected amount for these, divide by 12, and add to your monthly budget. This ensures you save a little each month for the bigger periodic costs.

Calculate Minimum Monthly Income

Add up your fixed expenses, estimated variables, and periodic costs allocated monthly. This gives you the minimum monthly income you need to cover your regular budget. As your earnings fluctuate month to month, this number helps ensure you always make enough to pay the bills.

Automate Savings

With an irregular income, savings is even more essential so you have reserves for the lean times. Decide on a savings amount that works for your income, even if it’s small to start. The key is to make it automatic each month, so you pay yourself first before spending on other things. Here are some options:

• Set up auto-transfer from checking to savings on payday
• Direct deposit a portion of each check to savings
• Use a percentage – like 10% – rather than a dollar amount

Automation takes willpower out of the equation so you effortlessly build savings over time. You can always increase the amount later when finances allow.

Use a Budgeting App or Spreadsheet

With income ups and downs, a digital tool can make budgeting a lot easier. Apps like Mint, You Need a Budget, EveryDollar, and others help you:

• Link accounts to track all spending
• Set budgets for each category
• Get alerts when you’re close to budget limits
• See where your money goes each month
• Forecast upcoming expenses
• Track income and balance over time

Spreadsheets work too if you prefer DIY budgeting. The key is having an overview of cash flow so you can adjust on the fly.

Use the Envelope System

If digital isn’t your thing, the envelope system is a great manual way to budget irregular income. Here’s how it works:

1. Decide on budget categories and amounts.
2. Label envelopes for each category (groceries, dining out, etc).
3. Withdraw cash when you get paid, then divide among envelopes.
4. Spend from envelopes throughout the month.
5. When an envelope is empty, stop spending in that category.

Having visible limits curbs overspending when you have extra cash in hand. You can tweak envelopes amounts as income fluctuates.

Build Your Emergency Fund

With an irregular income, an emergency fund is crucial. Shoot to save at least 3-6 months of fixed expenses so you have a cushion for income gaps. To build it:

• Save any extra income beyond your budget
• Put windfalls like tax refunds straight to emergency savings
• Cut back expenses temporarily if needed to free up cash
• Pay yourself first before any other savings goals

Even small amounts add up over time. The peace of mind is worth it when you have reserves to tap in case of illness, slow periods, or unexpected costs.

Have a Side Hustle

Extra income from a side gig helps smooth out dips in your irregular earnings. Find something flexible you can do in spare time that brings in cash, like:

• Driving for a ride sharing service
• Doing surveys online
• Selling handmade crafts or artwork
• Babysitting or pet sitting
• Freelance writing, design, or programming
• Flipping and reselling items

Even an extra $500 a month goes a long way. Having a side hustle ensures you always have funds coming in.

Reassess Frequently

Update your irregular income budget frequently, especially in the first few months. Review spending, adjust categories, and check that your income is aligning with what you need. Tweak and improve as you learn more about your earning patterns.

Budgeting is a continuous process. Stay on top of it and you’ll get better at creating (and sticking to) a plan that works for your situation.