Freelancing, contracting, and in some cases, unstable income from a full-time job, are increasingly common. If you fall into one of these categories, you’re likely used to having your income change month-to-month. In other cases, seasonal work leads to this kind of instability.
There are many great jobs that produce irregular incomes. That’s fine, but it causes a unique challenge.
Most budgeting advice is meant for and only applicable to people with regular, predictable incomes. If you get the same paycheck every two weeks, budgeting is quite simple. The biggest challenge comes when you get a salary increase.
With an irregular income, you can still make a robust and fairly reliable budget. Budgeting simply becomes a matter of accounting for your predictably unpredictable income. Let’s go over the simple changes you can make to have a workable budget for your situation.
Budgeting on an unstable income requires some considerations that account for the instability.
While your income may shift month by month, your most significant expenses likely don’t. Then, when it comes to things like groceries, your budget can effectively make them “fixed” expenses.
Some items, such as rent or mortgage payments, are more or less set in stone. So, your first step isn’t so different from anyone else’s. Account for what’s fixed, which in your case is only expenses.
These factors most often include:
For other factors, you will have to make a fixed budget. For many expenses, you will need to set a fixed budget that accounts for your minimum fluctuating income. Those factors include:
These categories can be a bit trickier, but you can set a budget based on historical expenses. For example, take all your grocery bills for the last month and set an average. Then, make that your definitive grocery budget.
In some cases, you don’t have the information you need. If you aren’t using cards where transactions end up on bank statements, you may lack information on your spending.
In this case, you could start recording your spending either the old-fashioned way (write or type each expense down when it happens), or the modern way. The modern way would be with a budget app.
Using a budget app is the simplest and most useful way to track your spending. Most budget apps can immediately account for new transactions. They then typically split your spending categorically. So, you can see how much you spend on groceries, entertainment, and so forth.
These budget apps typically also provide visualizations of your spending, or at least percentage values.
Using this information, you can set a realistic, solid budget for your variable expenses. Setting real limits is key to living on an unstable income.
If you make an unstable income, having credit cards as a backup plan is very unwise. Credit card interest rates are particularly large. Credit cards are merciless, by design.
Ideally, you should not view any kind of credit as part of your backup plan. Of course, forgoing credit entirely is often not realistic. But you can still normally choose better options.
If you have an average or better credit score/credit history, you should qualify for an unsecured line of credit. Lines of credit carry much lower interest rates than credit cards. In general, the repayment process is far less expensive and more liberal than it is for credit cards.
You can also consider secured lines of credit, such as HELOCs. However, make sure you understand the severe consequences of the irresponsible use of any loan products before doing so.
Interest rates for secured lines of credit are typically extremely low, but they are obviously still very risky.
Zero-based budgeting is a strategy meant specifically to handle irregular income. The goal is in the name: to make your budget zero for every budgeting period.
What this means in practice is knowing where every dollar you spend goes. You can divide it as you please, but you need to know exactly how much goes towards:
By being so stringent, you are forced to see any changes to your budget right away. You can’t let your spending get out of control, and you can re-adjust quickly when you need to.
Saving must be a default, regular activity for anyone with an unstable income. This includes emergency savings, in particular, which we will delve into later.
Zero-based budgeting, and budgeting for an unstable income in general, requires savings as a priority. So, transferring a portion of each paycheck, whenever possible, into a savings account, is recommended.
The purpose of this isn’t always serious emergencies; you can simply pay yourself forward. When you find yourself making less than expected, savings from prior payments can keep your finances stable.
By the same logic, overspending during good months is the easiest way for an unstable income to become a liability.
Unexpected changes are a given, so this kind of fiscal discipline is a necessity for survival.
Lastly, emergency savings are a necessity as well. This is especially true if you lack the insurance that comes with full-time employment.
Read more about emergency savings in 5 Helpful Things You Need to Know About Building Your Emergency Fund.
Living on an unstable income has unique challenges. But it doesn’t need to be stressful. Regardless of the nature of your income, the financial practices that are best remain the same.
The only difference with unstable income is that you must adjust for unpredictability. That means zero-based budgeting, always saving, and accounting for any fixed factors in your finances (expenses, mainly).
Whenever possible, savings accounts should be your backup during difficult times. Where you must resort to borrowing, refrain from using a credit card. Low-interest alternatives are available and are easier to recover from.
August 13, 2022
August 10, 2022