{"id":4616,"date":"2009-07-27T05:00:12","date_gmt":"2009-07-27T12:00:12","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=4616"},"modified":"2019-10-10T18:54:52","modified_gmt":"2019-10-11T01:54:52","slug":"how-to-budget-for-an-irregular-income","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/how-to-budget-for-an-irregular-income\/","title":{"rendered":"How to budget for an irregular income"},"content":{"rendered":"

I’ve been a full-time professional blogger for more than a year now. It has been a fantastic experience, a sort of dream come true. But blogging for dollars is not without its drawbacks. As I’ve shared before, I feel socially isolated. I spend most of my time in this office<\/a>, writing about money.<\/p>\n

Also, the income can be irregular. For some bloggers, it is very<\/em> irregular. One month you might have record earnings \u2014 and the next you might experience your own personal financial crisis. Bloggers aren’t the only folks who struggle with the fluctuating incomes, of course. Many self-employed people face the same issue, as do those whose pay is tied to commission.<\/p>\n

Creating a budget when your income fluctuates can be a frustrating experience.<\/strong> I am sure that each of us finds our own ways to cope. Today, I want to share the method that I’ve developed.<\/p>\n

<\/span>Projecting Income<\/span><\/h2>\n

Most articles I’ve read on this subject suggest basing your budget on your average<\/em> monthly income from the past 12 (or six or three) months, but I don’t recommend that unless your income has wild swings \u2014 $12,000 one month and $0 the next. As this past year has demonstrated, incomes can and do decline. A prolonged decline wreaks havoc with the “average income” budgeting method.<\/p>\n

When I project my cash flow<\/a>, I base it on my minimum<\/em> monthly income from the past 12 months.<\/strong> Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital.<\/p>\n

Note:<\/strong><\/em> If your income is variable, but you know that you will always<\/em> make at least $X,XXX, then it makes sense to base your budget on $X,XXX. Anything you earn above this amount is gravy.<\/div>\n

<\/span>A Hypothetical Example<\/span><\/h2>\n

For the sake of illustration, I constructed a hypothetical example of the monthly income a freelance designer might have earned in 2008:<\/p>\n

Hypothetical 2008 income<\/em><\/strong><\/div>\n

The “actual” column shows the designer’s actual income by month. The “average” column shows the average for the entire year. Using the standard advice, this designer would then construct her 2009 budget based on the average<\/em> monthly income from 2008. Her 2009 budget would be $3,891.67 per month. But what if her income declined in 2009, as has happened to many freelancers? Here is a plausible scenario:<\/p>\n

Hypothetical 2009 income<\/em><\/strong><\/div>\n

In this instance, the designer’s average monthly income for 2009 was $3,600, or nearly $300 less than she budgeted. And because her first few months were fantastic, she might have been tempted to splurge beyond her budget. That would have been a mistake. If, instead, she had constructed a budget based on her lowest<\/em> month in 2008, she would have done okay.<\/p>\n

 <\/div>\n

Now, obviously I fabricated these numbers out of thin air in order to make a point<\/strong>. But based on recent conversations with a variety of people who earn irregular income (bloggers, designers, contractors, entrepreneurs), many<\/em> folks are facing this sort of situation in 2009. Their incomes have dropped, and their budgets weren’t ready to cope with this.<\/p>\n

<\/span>Building a Budget<\/span><\/h2>\n

Projecting cash flow is only part of the battle. After finding a basis for my budget, I followed a simple system to manage my money. I recommend using two different bank accounts to make this work:<\/p>\n

    \n
  • The first is your “business” account (without quotes for those of you who actually own businesses), which is where you deposit all of your income. My business account is a high-yield savings account with ING Direct. (You might use FNBO Direct or some other bank. Just choose something with a high interest rate.)<\/li>\n
  • The second is your personal account, and it is from this that you will pay your ongoing expenses. There is no need to open a new account if you already have one that will work. I just use my existing credit union checking account.<\/li>\n<\/ul>\n

    Every month as you earn income, receive it (and leave it) in your business account. This is where you accumulate your cash. Because it’s in a high-yield account, it earns interest as it waits for you to use it.<\/p>\n