When setting up your budget, you may wonder how to budget on an irregular income. You might be in a situation where your income isn’t consistent from one month to the next. You might work on commission, or you may have overtime pay some months but not others. Or you may own a business where your sales and revenue fluctuate from one month to the next. There is a way to plan your budget in these situations. It’s just not as cut and dried as for those with consistent income.
Start With Your Lowest Income Month
It will take a little time to get used to budgeting on an irregular income. It’s best when starting out to start with a low figure for your income. Look back over the last several months to see what your lowest month was for income. You can always add more as your income comes in. This might mean that planning your expenses might be more limited. But when planning expenses, start with the most necessary expenses and work up from there.
Build Up A Surplus Fund
One thing you could do when budgeting on an irregular income is to have a surplus fund. This would be a fund that you can put excess money into in the months where you have an above average income. That way when you have a lower than average month, you can transfer money from the surplus fund to cover all of your expenses. It can be a bit of a balancing game, but the goal is to have extra to cover the lower income months.
You May Need A Larger Than Average Emergency Fund
In some cases your income is much more irregular than normal. In these situations it would be a good idea to have a larger than average emergency fund. Here is a bit of an extreme example. Say someone retires and they rely primarily on income from their investments. We’ll also say that a large portion of their income comes from gains in the market. If there is an extended downturn in the market, income may be greatly reduced during that period.
We can look at the market downturn in 2022. Most of that year the market went down overall. It took most of 2023 to recover to its original high. That would basically be a two year period where it may be difficult to make money from gains in the market. That’s why it’s important to be prepared for these periods when you’re depending on your investments for income.
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