Not everyone has a steady income: Freelancers, sales professionals, contract workers and others may live on irregular compensation. Unpredictability can cause unnecessary stress. With the right budgeting method, however, you can mitigate that stress and create an actionable plan for managing your monthly expenses even when your income fluctuates.
A budget should help you see at a glance how much money you have to spend on life’s necessities like housing, utilities and food. Plus, a budget will show you how to maximize your ability to save for the future.
Keep the following tips in mind as you prepare to examine your personal finances and create a budget that works for your lifestyle:
Define your essential monthly expenses
The purpose of a budget is to ensure that you can fulfill your financial obligations. These include essentials that support your basic needs, including housing, clothing, food and medical care. Beyond that, your other essential monthly expenses likely include:
- Insurance premiums.
- Taxes.
- Utilities.
- Car payments.
- Gasoline.
- Phone and internet service.
- Child care.
- Loan payments.
The first step in creating a budget, no matter how irregular your income, is to carefully calculate these expenses. If you aren’t already in the habit of tracking your spending, you may need to look at your credit card statements and receipts to get an idea of how much you spend each month.
Ideally, you will track every dollar that comes into your possession. This is called a “zero-sum” budget because you will either spend every dollar that you earn in a month or earmark them for savings. We will discuss this concept in more detail later on. For now, keep in mind that your goal is to know exactly where your money is going. If you cannot track every dollar you spent last month, just do your best to account for as much as you can, and then focus on tracking everything this month and going forward.
Track your spending meticulously
Once you have a good idea of how much you need to spend on essentials each month, you’ll need to monitor your expenditures going forward. You may find that your estimates were correct, but you might also encounter expenses that you hadn’t considered before. At this stage, it’s best to avoid negative emotions — simply record where your money goes. This will help you to create a better budget next month.
So, how will you record your spending? This is up to your personal preferences, but there are a few established methods that you may want to consider:
- Pen and paper: This is the simplest and most cost effective way to track your spending. All you have to do is carry a pocket-sized notebook and pen with you wherever you go. Try to make it a habit to record every transaction you make, from grabbing a cup of coffee to paying your car insurance. At the end of each week, you can categorize your spending and put your figures into a spreadsheet.
- Manual budgeting app: There are a number of free and paid apps that enable you to track your spending. This method offers a number of benefits over pen and paper: Namely, it will be much easier to categorize each transaction and perform calculations. You will still need to build the habit of recording your transactions.
- Automated budgeting app: Some apps allow you to connect your credit and debit cards directly. This way, all of your transactions will be automatically recorded and categorized for you. Of course, this type of app cannot track cash transactions, so you will still need to enter those manually. If you choose this method, be sure to carefully read all terms and conditions. Only use apps that you absolutely trust.
Estimate your lowest monthly income
Moving forward, you should base your budget upon your lowest monthly income. It is important to be conservative with your estimates, as this will ensure you can pay for your most pressing obligations while leaving plenty of room for your budget to grow.
Gather your pay stubs and any other records of payments from the previous year. Choose the lowest amount and base your budget on that figure. If that amount is not enough to cover your monthly responsibilities, you may need to find ways to cut down your expenses. For example, you can lower your monthly housing payments by getting a roommate.
Income earned above your lowest monthly estimate should be considered as extra income. You can use this for savings or long-term spending projects, such as saving up for a down payment on a house. However, you should not count on this extra income to pay for essentials.
Identify non-essential expenses
Everyone has non-essential expenditures that, while not necessary, make life worth living. This might include your daily cup of coffee, a video game purchase, or an annual trip to the beach. Having a strict budget does not mean you have to give these things up and live a minimalist lifestyle.
On the contrary, a monthly budget gives you more freedom. When you know that you can pay for your essentials, you can budget the remainder of your money for other things. For example, say that next month you earn $1,000 above your lowest monthly estimate. Using your budget, you can assign those dollars to other categories. You might assign $500 to a long-term savings goal, $250 to your retirement savings, and then split the remainder on entertainment like movie rentals or a night out with friends.
Make a list of the non-essential expenses you are likely to encounter. This will help you assign your extra dollars when they arrive in your bank account. Each month, your goal should be to spend or give a purpose to every dollar that comes into your account.
Consider building an emergency fund
Living with an irregular income causes stress because you never know if your lowest amount earned in the past year will continue to be your lowest amount of income. It’s possible that conditions outside of your control may limit your ability to work and earn money. For example, in 2020, the COVID-19 pandemic caused many freelancers to lose out on work that they needed to pay for rent and other essentials. While the federal government came to the rescue during that crisis by extending federal unemployment protections to non-traditional workers, that was an extreme circumstance.
You can gain peace of mind and reduce your stress by creating an emergency fund. This is an amount of money that you keep separate from your other funds. The intention behind an emergency fund is to have money that you never touch unless it is absolutely necessary. This will ensure that you can pay for unexpected expenses without getting into debt, which can create a vicious cycle where high interest rates can make it more difficult to stabilize your finances.
The right amount of money to keep in your emergency fund will depend on your unique situation. Many people save between three and six months worth of expenses in a savings account. However, people with irregular income often feel more comfortable keeping up to one year’s worth of expenses. If you aren’t sure how much to keep in your fund, think about how long it might take you to find a new source of income if your current one were to disappear today.
Keep your budget accessible
The more effort you put into your budget, the more benefits you will see. Refer to your budget frequently, especially before you make any purchases outside of your essential expenditures. This will not only prevent compulsive spending, but also help you feel more comfortable spending your money.
For example, if you were to make a large transaction, such as buying a new TV, without knowing whether or not you can afford it, you’re likely to experience buyer’s remorse. That is especially true if you end up accumulating credit card debt to pay for the TV. However, if you carefully budget and save for the TV, you can make the purchase with the comfort of knowing that you still have the funds available to pay for necessities.
Don’t get discouraged — keep budgeting!
If you are new to budgeting, you might find it difficult to build the habit of tracking your spending. In your first attempts to do so, you may miscalculate your monthly expenses or forget to check your budget before making a nonessential purchase. Try not to blame yourself when these things happen. Learn from the process and keep budgeting. The more you practice, the more budgeting will come naturally to you.
Keep your cash safe
By following your budget and focusing on paying essential expenses first, you may have extra cash left over at the end of the month. Because you’re living on an irregular income, it’s a good idea to keep this additional cash in a place where you can easily access it in an emergency. Plus, you’ll need somewhere to store your money for large expenses in the future.
A non-interest bearing checking account is one of the most common and useful places to keep your cash. With the Comerica Access Checking account, you can benefit from no monthly maintenance fees and other key benefits like free Comerica Web Banking®. It’s the perfect place to keep the money you plan to use for monthly essentials and short-term savings.
