How to Budget an Irregular Income
I could be wrong, but methinks many a freelancer doesn't budget because they think it can't be done. (I mean, how can you plan for something when your income is so irregular?).
Well, I'm here to say that it can be done, I have done it, and it doesn't have to be painful.
It just comes down to five easy steps.
Step One: Define What The Spending Period Is.
If “pay period” is defined as the time spent to make the money, a “spending period” is the period when you actually spend it. (And this is my definition entirely).
If you get paid on 3/15 (and beware the ides of March, btw), your spending period would be from that date to whenever you believe you'll get your next paycheck. If you don't know when that'll be, then it's a matter of prioritizing your spending. Here's how:
Step Two: Define What’s to Happen During the Spending Period
Coming from a screenwriting background, I find this part of the process to be oddly fun.
I'm essentially writing a script with money about where I'm going to go and what I'm going to do.
Because, like a screenplay, a budget is just a plan.
You're writing it so you know exactly where your character is going to go, what they’re going to do, and what they’re going to spend. (Of course you can't know precisely how much you're going to spend. A best guess is fine. But stick to it!).
So let’s figure out the plot:
What special events will you be attending?
What bills (fixed or variable) are due?
Maybe you'll mainly be working for the next two weeks, but you have a dinner on 3/25 to celebrate your friend's birthday.
In addition to your regular expenses, you also have a car insurance monthly premium due on $117.80 on 3/22; a Spectrum bill of $89.00 is due on 3/24; a credit card minimum of $42 is due on 3/25.
Plus, rent is coming up on 4/1 (of the $1K that’s due, we’re going to pretend you already have $750 in your personal checking account).
Step Three: Save Yourself and the Six to Survive
Save 10% to put towards a starter emergency fund. You know that you always need to pay yourself first, and a good rule of thumb is 10%.
You don’t always have to save (you can also use this part of the budget to allocate money to retirement, save for a dedicated purchase, or do something else). The point is that you’re not just a conduit for money to go through to pay other people - you need to keep some for yourself.
The next priority is the Six to Survive. As mentioned here, the Six to Survive are food, clothing, shelter, transportation, utilities, and medication. You need food in your stomach, clothes on your back, shelter to sleep in, transportation to get around in, utilities to live comfortably and communicate with the outside world, and (prescription) medication.
I say this with a caveat: you may not be spending in all six categories per spending period (sometimes neither transportation nor medication will be needed). Still you need to doublecheck with them first; these categories take priority over anything else.
So, let's create a list for the rest:
Food: $120 for food for groceries and eating out.
Clothing: Nothing this spending period.
Rent: $250 this is the amount you'd need to make your next rent payment (note: you already have $750 in a personal checking account allocated towards rent).
Transportation: $197.80 for transportation - this includes the $117.80 car insurance payment and $80 for gas (hello, inflation)
Utilities: $89.99 for Spectrum internet
Now that we’ve taken care of $672.79 for savings and the Six to Survive, what comes next?
Step Four: Dedicate the Remaining Funds
Let's go back to the movie metaphor and take care of the rest: you're going to check your calendar to see what bills are due and what special events are going to happen.
In an allocated spending plan (which this is), you’re paying for things in order of priority. And you get to decide what those priorities are.
You have a credit card minimum of $42.00 due, so you set aside money for that (and even pay for it ahead of time.
On 3/25, you know you're going out, so you set aside $120 for food, so that also incorporates $40 for a birthday dinner to take your friend out. You also set aside $35 for a gift.
Looking ahead to the future, you don't see anything else you could be doing, so you set aside $50 for a "Fun Fund." A "fun fund" represents any fun events that may come up. Allocating money ahead of time gives you the flexibility in planning in case anything comes up.
If anything that arises that goes beyond the $50, you won't do it. Why? It's not in the budget. And if it's not in the budget, it's not happening.
Step Five: Balance the Budget
Using a zero-based budget means that every dollar that comes in is accounted for so that the balance is zero. Nothing is left over.
Now, we've allocated $919.79 out of the $1,200 with $280.21 left over. So what do you do with it?
You decides that you're going to allocate it to a hills-and-valleys fund. A term coming from real estate, "hills and valleys" just means it's any overage that you'll use for unexpected expenses later.
THE BUDGET IS BALANCED!! THE BUDGET IS BALANCED!!!
So, now all you have to do is make your plan a reality.