Anyone who has ever been a freelancer, worked on commission, or relied on tips knows the boom-and-bust cycle of having an irregular income. How are you supposed to budget when you don’t know which months feature steak dinners and which ones require ramen noodles?
Thankfully, there are some simple (but not necessarily easy) steps you can take to smooth out your irregular income. Here’s how to stop the feast-or-famine cycle:
Step 1: Calculate Your Monthly Spending Needs
If you’re stuck in the middle of the boom-and-bust income cycle, your spending is probably reacting to your income, rather than meeting your needs on a monthly basis. That’s why your first step is to figure out how much you actually need to spend per month.
If you’re already breathing into a paper bag at the thought of having to track every penny, rest assured that it doesn’t need to be that way. Rosemarie Groner, founder of Busy Budgeter, broadly breaks down spending into five simple categories:
- “Net worth”spending: (Groner calls it this because it theoretically increases your net worth.) This includes debt payments, mortgage payments, transfers to savings, and transfers to investments. You should consider this as “good spending” and you want as much of that as possible.
- Food: This is everything from groceries to eating out and food delivery.
- Set expenses: This category is for recurring expenses, like Hulu and your cell phone plan. (We also put fuel in here since no one impulsively decides to splurge on extra fuel.)
- Stockroom: Consider anything purchased for the running of your home — from deodorant to paper towels — to be stockroom spending.
- Discretionary spending: This covers everything else from hair cuts to vacations — to that Ninja Foodie you grabbed at Target because it was such a good sale.
“These categories give you an easy, monthly snapshot of your ‘good spending,’ such as transfers to savings and debt payments,” Groner adds. “Also, you won’t be able to hide spending in complicated categories — like the reduction of grocery spending that coincides perfectly with tripling your spending on eating out.”
How to Track if You Hate Tracking
If even this kind of spending categorization sounds like something you’d happily undergo unmedicated dental surgery to avoid, Roger Whitney, host of The Retirement Answer Man podcast, has a suggestion: “I don’t like budgeting. So I just come up with a number and say I need X amount per month,” he says.
As long as your spending behavior is in check, using this “ballpark” strategy can help you figure out your spending needs through trial and error.
“I think it’s important to understand that you don’t necessarily have to change your behavior,” he explains. “Find a system that can fit your behavior, and modify it to work for you.”
Step 2: Open a Savings Account
According to Groner, one of the best ways to manage variable income is by opening a hard-to-access savings account. Why? Because you need a place to stash your savings where you’re not likely to spend it.
“If people don’t naturally have willpower, it’s extremely hard to put aside extra income,” Groner explains. “The easiest way to solve this is to keep that money in a bank account that’s separate from your normal checking account. That way, you aren’t constantly seeing the balance and thinking of ways to spend it.”
No matter how pure your savings intentions are, it can be too easy to spend money that’s easily accessible, even for budgeting experts like Groner.
“Most people – my family included – need the restriction of a harder-to-access account to take our budget seriously and live within our means,” Groner says. “This was a key factor in paying off over $35,000 of debt and reducing our spending by over $23,000 a year.”
Roger Whitney, host of The Retirement Answer Man podcast, agrees that putting money out of reach is far easier than relying on willpower.
“Why tempt yourself?” he asks. “I avoid temptations, and if I can do that, I do alright.”
Step 3: Deposit Your Income into Savings
So you’ve got your not-so-accessible savings account and you’ve calculated your monthly spending needs. Now you will start having your income deposited directly into the savings account.
This can feel a little scary, according to Groner. “If you’re used to living hand to mouth, you might worry that you’ll need the money quickly and won’t have access to it,” she says.
But making the bulk of your income inaccessible is the point.
“Because your savings account doesn’t have a debit card or checks, the only way you can access your money is by transferring it to your main checking account,” Groner says. “So it’s not an easy spending option and gives you a built-in 2- to 3-day cooling off period.”
Step 4: Set Up a Transfer to Your Checking Account
And here’s where it all works out: With your income now deposited into your savings account, you can start automatically transferring your monthly budget into your checking account.
Whitney, who has always had an irregular income, has been following this system for many years. “I have all of my income coming into a separate account,” he explains. “And then I just transfer over the monthly amount I need to my checking account at the beginning of each month.”
So why the extra steps to get your money? In a word: guardrails.
This system won’t let you blow your excess income during flush months, and it protects you from having to dig for couch cushion change during lean ones. “The goal is to build a reserve so you don’t have to worry about having a flatline,” Whitney says.
Depositing your income into savings and then transferring no more than what you need to checking each month means you get to enjoy the benefits of a steady paycheck — even on an irregular income.
Volatility Ain’t Got Nothing on Me
If you’re tired of lurching from one big, irregular payday to the next, know that you don’t have to accept a volatile financial life just because your income is volatile. You can put a system in place that will capture your extra income and enforce ongoing frugality.
“If what you’re doing now isn’t working, that doesn’t mean that you’re broken or not good at budgeting,” Groner says. “Each budget looks different based on people’s personalities and current problems. But putting your extra money ‘out of sight and out of mind’ will make it easier to find your path to financial stability.”