If you get paid on a regular schedule for your salaried job where you know what your check amount is going to be weeks in advance, it’s pretty easy to financially plan when you know that your paycheck the second week of January is going to be the same amount as your paycheck the second week of June. But what about those folks who don’t have regular, repeating paycheck amounts and instead have irregular income? How do they plan their finances for the year?
Well, let’s start by figuring out what kind of irregular income you have. Do you have a set salary but you get bonuses a few times a year, maybe quarterly, that are actually a part of your overall compensation package and are fairly substantial? Or perhaps you have a smaller paycheck for your hourly work which is rounded out by tips which you receive daily or weekly, and maybe even in cash? Or you might have a side hustle to supplement your regular paycheck and that side hustle money varies based on how much time you have available to work? Or you get paid solely on commission and you are trying to sell in a very busy or very slow season, so your checks come often or not often enough?
All of these are common examples of irregular income and all of them have unique budgeting and financial planning needs. It can be hard to financially plan out your month and year when you don’t have the same amount coming in each paycheck. But there are some basic rules to help guide you when planning for an irregular income.
Know Your Actual Take Home Income
A lot of people with varying incomes actually don’t know what their take home pay is. Sure, this might be a bit complicated since it may vary wildly (see examples above) but you can look back at the last 3-6 months to figure out your average take home pay. Then compare it to your last year’s take home pay and see where you have hills and valleys, ie. months where you have a lot of money coming in and months where little is coming in. If you have a rough average amount you bring in each month that is supplemented by bonuses, write down when those bonuses usually come in and how much they are on average. If you live off tips or commission, what is your average take each month? You can also look at your prior year’s tax returns to figure out what your taxable wages were last year (and yes, those tips are taxable too). You can extrapolate your prior months’ earnings to plan for your future months’ if you have comparable circumstances, ie. you are working roughly the same hours and your business is continuing at roughly the same pace. If needed, scale up or down based on how business has been. If you are barely making any sales, you need to plan to have a low income month next month.
Know Your Actual Expenses and Make Them Reasonable
Whether you call it a budget or a spending plan, you need to know what your actual monthly expenses are and plan for them. If you usually just estimate your expenses or just pay your bills based on whatever is in your account at the moment, you are setting yourself up for a disaster when your variable income drops low in a valley month. Make sure your monthly expenses are reasonable and you can afford them each month regardless of if you have a valley month. Ideally, you will be able to pay for at least some bare necessities in a valley month: your mortgage, utilities, cell phones, gas, and groceries. If you have to include other things in your necessities group like medication, be sure to budget for that as well. If your monthly base necessities are too much for you to afford even in your valley months, then you may need to rethink your base necessity costs and find a way to cut them. It is imperative that you be able to live off of your base salary each month, sans bonus. If and when that bonus comes in, then distribute those funds throughout the coming several months to boost your overall monthly income, but it shouldn’t be what you are counting on to pay your mortgage.
Make Sinking Funds Float You
An irregular income means that you have to become well acquainted with sinking funds, and have them work to keep you afloat during the lean times. When you have a robust month in sales or your bonus comes in, drop the majority of that check into your sinking fund, a savings account set up just for this purpose. This is separate from your emergency fund which is to pay for things like the deductible on your homeowner’s insurance when a tree falls on your roof. You don’t know when an emergency will happen, but you do know that you will need that bonus money in the months to come and it would be irresponsible to blow it all now. Since you have already calculated your take home income while factoring in those bonuses, commissions, or tips, compare it to your actual living expenses. Set up a spending plan (or budget if you prefer) and allocate part of that bonus to each month. If you get a $5,000 bonus quarterly, you can sock it away in your sinking fund and transfer yourself $1,666 each month ($5,000/3 months) to supplement your base paycheck and round out your budget. If you don’t need that much of a boost each month you can transfer yourself a smaller amount and put the rest into savings for your annual family vacation, a new car, or invest it for your retirement. Alternatively, if you get a fat commission check for $20,000 but may not get another for a month or more (I’m looking at you realtors and car salesmen), fund your monthly budget with that check and sock the rest away since you will be living off of it for the next few months. If you have smaller weekly commissions or tips that get paid out to you on top of a modest regular wage, fund your base necessities first, then fund other items in your budget as the cash rolls in. That way, you have allocated money for the important things first and if you end up not having much in sales or tips by the end of the month you will run out of money for dining out or your vacation fund, rather than the money for your electricity bill. If you have a boom month, resist the temptation to go shopping or take a vacation. Instead, sock away anything leftover in your budget into that sinking fund since your income is quite volatile and could change week to week. When you have enough built up in your sinking fund to get you through a month or so then feel free to skim off some for that much anticipated vacation. It sounds pretty stringent to not revel in the fruits of your labors right away, but it is better to save and plan to get through the meager months and then take a vacation when you have saved for it rather than to blow your bonus on a tropical vacation and return burned physically and financially.
Plan for The Worst
We have been talking about planning for how to budget for and spend your bonus, commission, or tip money. But what happens if you don’t get any of that money? What if your bonus never comes or you don’t make any commissions or tips? Maybe you lose your job or maybe it’s been a terrible few months for your company. Sometimes, that irregular but expected income may stop or be substantially smaller than you had expected. When you have an irregular income you need to have more money in the bank than a person that has a steady, predictable income. Ensuring that you can get through a lean month or two is key, hence keeping money in a sinking fund to help you smooth out your income hills and valleys. In addition, you will want to build up a 3-6 month emergency fund. Everyone, irregular income or not, needs an emergency fund to get them through any major emergency or job loss. But those who rely on large chunks of their income arriving based on product sales or quarterly revenues may find themselves at greater risk of needing to tap those reserves. Use those bonus or commission checks to fill up your sinking fund, and then use any remainder to sock away for emergencies and long term savings.
An irregular income can make financial planning a bit complicated and it can be hard to map out your future financial plans when you don’t know what your future income will look like. But it is still possible to plan even without numerical surety. With an irregular income, you don’t have the luxury of operating on financial auto pilot. Financial planning is especially important when your money is not at all regular, so those with an irregular income will need to make sure to have a strategy and extra savings on hand. With a little forethought and saving, you can absolutely live well on your bonus without blowing it.
