Budgeting for Irregular Income: A Guide for Freelancers & Entrepreneurs

Calling all entrepreneurs, contractors, small business owners, and commission-based professionals!

If you’re an individual who has ever lived on an unsteady income, you know budgeting can be an arduous task.

Even in the best of times, budgeting is challenging… but fear not.

Lean in and listen closely.

We’re going to let you in on the secret to success with an unsteady income.

If you have a hard time knowing how much money you will have from paycheck to paycheck, then the key is to find out how to create a budget which works well in both the healthy months and the lean months.

Without further ado, here is our list of the top 7 ways to budget your irregular income.

How to Make the Most of Your Irregular Income

#1 Stick to a conservative budget.

First things first. To manage your income, you have to create a budget.

Whether that’s with pen and paper, an Excel spreadsheet, or an app of your choice, mapping out a budget is crucial.

With an irregular income, you need to be sure to come up with a conservative budget.

Here’s how:

• Look at your last 12 months of income and write down your lowest monthly income.
• Do the same thing by looking at your last few years of annual income and write down the lowest annual income you have had, then divide that number by 12.
• Use these two numbers to come up with a conservative budget.
• These numbers represent the worst income you might have, so you want to make sure you don’t overspend your income.

Bonus Tip: Be sure to include your savings in this budget, otherwise you won’t be able to continue making your retirement or other investment contributions.

#2 Slash your fixed monthly expenses.

The biggest problem most people have with their budget is their fixed expenses.

The more fixed expenses you have, the more difficult it is to make ends meet when you have less income.

Reduce your fixed expenses by:

• Getting out of debt. There’s no better way to financial freedom than eliminating debt from your life.
• Paying off credit cards and loans is a major means to reducing expenses, the sooner the better.
• Refinancing your mortgage can make your monthly budget far more manageable.
• Doing a 0% balance transfer allows you to move your credit card debt from a high-interest account to a lower one to pay it off.
• Downsizing to a more affordable home or car is a great way to decrease your fixed expenses significantly and give your budget some breathing room.
• Cutting non-essential subscriptions will add some change to your pocket. If all your streaming services are adding up, you may want to cut the cord on a few.

#3 Bank the difference.

Let’s go back to the conservative budget.

You create it to be conservative for a reason.

Why? You never know when your income will be high or low, so it’s important to plan for the worst so you are always prepared.

That is why it is so important to save any extra money when you earn more than your budget calls for.

The best place to send your extra cash, at least until it is fully funded, is an emergency fund, which we will cover next.

#4 Create a robust emergency fund.

Your emergency fund is more important when your income is volatile, especially if you’re a freelance worker or if your industry has experienced layoffs or other employment issues.

If your career isn’t what you would consider to be stable, then you need to set aside more money for emergencies than the average person.

Instead of saving 3 months of income in a cash account, consider saving up to 6-12 months of income if you can.

#5 Open a surplus savings account.

Let’s say you’ve been quite the thrifty spender and successfully stored 6-12 months of income in your emergency account.

Way to go! But, what now?

If your unsteady income has hit a profitable patch and you want to save some of your money elsewhere, consider opening a secondary savings account.

The account essentially functions the same as your emergency fund does, but it’s a bit more accessible in tighter months and allows you to leave your 6 months to a year’s worth of savings untouched.

#6 Invest the right way.

Just because your money is tight doesn’t mean you can’t be an investor!

• Start by maxing out your 401(k) if you have a company match on your contributions
• Otherwise, start with a Roth IRA, if you are eligible.
• Then work toward maxing out both of these investments.
• If you find you have more money to invest or you have non-retirement goals, then open a brokerage account for non-retirement investments.
• Because of the nature of your income, you may wish to have more cash available, or a lower percentage of your portfolio invested in retirement accounts. This may be a good idea, since early withdrawal penalties can cost you a lot more than you think.

#7 Take advantage of budgeting apps.

Budgeting can be daunting, but fortunately there are a plethora of free online money management apps on the market.

Apps like Personal Capital or Mint not only allow you to enter your expenses, income, and other factors to build a budget, but they also make suggestions for how to improve your spending habits and highlight alternative services to save you money.

A budget is completely worthless if you don’t stick to it.

With a multitude of payments to make and a business to run, you may need help remembering to make payments on time.

If so, utilize free calendar and notification apps to alert you when it’s time to make a payment.

You might also consider automating payments through your bank or lenders to ensure you never miss a payment, keeping your budget (and your credit) intact.