I recently met with a couple to create a debt elimination plan and when we began discussing whether they had a budget they explained that they couldn’t live by a budget because their business income was sporadic. Based on that conversation, I decided to write this post and give a 2-prong approach to budgeting when you have irregular income.
The first prong of this strategy is what I call priority-based budgeting. With priority-based budgeting, list your expenses by priorities and pay as far down that list as you can whenever you receive income.
The second prong of the strategy is to plan for the bad months during the good months. You do this by:
- Estimating your yearly income and divide it by 12 to determine what your average monthly income is;
- Establishing a savings reserve from which you can draw income during the months that you fall short (See Five Quick Ways to Create a Cash Reserve); and
- During the months that you earn more than your average monthly income, rebuild you savings reserve if you’ve had to draw from it. Make it a goal to maintain a balance of at least one month of living expenses in this account.
Keep in mind that this savings reserve is different and separate from your emergency fund (Ingdirect is a great place to keep your emergency fund. Send me an email if you’re interested in opening an account and getting a $25 bonus). Keep this money in an account designated solely for this purpose and use it only to make up the difference in a slow sales (business) month.
By using these two methods together, people with sporadic income can create a budget and have accountability in their spending. No more excuses–create your priority-based budget today!
