April 5th 2024.
It's a common complaint I hear all the time: "I can't stick to a budget when my income fluctuates." And let's be real, it's definitely more challenging to budget when your money is inconsistent. But that doesn't mean it's impossible. In fact, if you have an irregular income, you actually need to be budgeting more than the average person with a biweekly paycheck. It may seem daunting, but with the right approach, you can successfully manage your finances even with an inconsistent income.
Before we dive into the steps for budgeting with an irregular income, there are a few things to keep in mind. While your income may vary greatly, many of your expenses will not. That means even if you have a great month, you still need to plan ahead and prepare for the possibility of a not-so-great month in the future. And let's face it, life is unpredictable. Emergencies and unexpected expenses can pop up at any time, so it's important to have a plan in place to take care of yourself when these situations arise.
Now, let's get into the steps for managing an inconsistent income. The first step is to determine your average monthly income. Ideally, you should include as many months as possible in your calculation, but at the very least, use the past three months to get an accurate average. However, it's important to exclude any windfalls or one-time sources of income from your calculation. This is about creating a realistic budget for your future, not relying on misleading information from the past.
Next, take a look at your expenses and see how they compare to your average monthly income. If you find that you can only cover your expenses during your good months, then it's time to make some cuts. Your expenses should always be based on your average monthly income, not the occasional great month. Anything that can be considered a want rather than a need should be put on hold until your income increases for at least three consecutive months.
It's also important to have a cushion in your budget for unexpected events. I recommend setting aside 5-10% of your budget for this purpose. This way, you won't be caught off guard when something unexpected happens and you won't have to dip into your emergency fund. And speaking of emergency funds, it's crucial to have one. However, I prefer to call it an "opportunity fund" because the words we use have a powerful impact on our mindset. Instead of waiting for a rainy day, this fund is there to help you take advantage of opportunities that come your way, both good and not-so-good, on those months when your income may be below average.
Managing an inconsistent income can be challenging, but with these steps, you can create a budget that works for you and your unique financial situation. And remember, budgeting is all about making your money work for you, not the other way around. So don't be afraid to make adjustments and find what works best for you. With a little planning and discipline, you can achieve personal finance success, even with an unpredictable income.
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