One of the biggest changes that any of us will ever experience is going from a steady, stable income to an irregular income.
This could be for a great reason – you’ve finally started that business you’ve always dreamed of or left your day job to go freelance!
But it could also be for a stressful reason, like a pandemic furlough; layoffs or redundancies; a drop in client work; or a need to shift to part-time work or gigs to free you up to care for a parent, child, or even yourself.
Adapting to an irregular income when you’re used to a steady paycheck can pile all kinds of new stress onto an already heaping plate. After all, uncertainty throws us off balance, and not knowing how much money you’re going to have to work with this month is not fun.
A few smart strategies can help you create a better budget and adapt to your irregular pay schedule a little more easily.
How to Adapt to an Irregular Income
1. Know Your Bottom Line
You may not know month to month how much money you have coming in anymore, but you can get a grip on what’s going out.
And you can’t create an effective budget if you don’t know how much money you actually need to live on.
So the first step in adapting to an irregular income as a new freelancer or self-employed business owner is to get an extremely detailed picture of your expenses.
This is Budgeting 101: where does your money go? Start making lists or spreadsheets if you don’t already know your expenses.
- How much is essential spending or fixed overhead? In other words, how much do you spend on rent or the mortgage, on utility bills, and on transportation? What can you absolutely not stop paying without life falling totally off the rails?
- How much is necessary spending? This category is about things that have a little wiggle room, but which you still absolutely need in order to get through the day-to-day. Think food, clothing, and services like internet and mobile. You have to have them, but you can make changes to cut back on spending here if you need to, like switching to store brand or changing grocery stores, thrifting clothes or not buying anything for awhile, or changing to a less-expensive prepaid mobile plan.
- How much is discretionary spending or optional expenses? We all have treats, splurges, and stuff that we spend money on but don’t really need. Do you have to have 4 streaming services, or are you only watching Disney+ these days? You made it through quarantine without a weekly manicure; can you cut back to monthly going forward, or have fun doing your own nails along to YouTube tutorials?
Once you have your bottom line, you know exactly where to start allocating your income, no matter how much is coming in month to month.
2. Work a Month in Advance
Hopefully you had an emergency fund or some savings stashed when your income changed to being irregular. This gives you a lot more leeway to set yourself up for success moving forward. But if not, never fear! You can still manage your money right on an irregular income.
Working a month in advance helps you stay ahead of your bills and on top of your income-to-expenses ratio.
Basically, you’re going to use this month’s income to plan next month’s spending, based on the lowest bottom line.
So let’s say you’ve got $5,000 in the bank, and your monthly expenses are $1,000 for essentials, $500 for necessities, and $500 for optional. So your total outgoing is $2,000, but can realistically be cut back to somewhere between $1,250 and $1,500.
Plan for that: $2,000 going out.
How much money did you make last month? If you’re just transitioning to self-employment, freelance or gig work, or other unstable income, you may not know. So take your best guess and divide it in half, just in case.
Now you can start allocating.
In the future, you’ll have more baseline data to use: you can see how much money you’ve made in various months and project forward based on that.
So if you know you made $2,500 last month, you can project something between $2,000 and $3,000 for next month with a little bit of confidence. A year from now, you can see even more patterns, like “I made $2,500 in August, but August is always a slow month. Business picks up in September, so I should be able to make more like $3,500.”
As you get more experience, you’ll be able to budget next month even more effectively. But for now, just focus on the bare minimum bottom line, based on your average monthly expenses and the lowest amount of money you can reasonably expect to bring in.
3. Set Up Buckets
Or whatever you want to call them: envelopes, pots, folders, stashes.
Just make yourself containers for where you put your money, and fill the most important ones first.
So that’s shelter, food, and the stuff that enables you to maintain a safe and healthy life.
If your income for the month exceeds that amount, you can start filling up other buckets with the overflow.
4. Use the Waterfall Technique
When you fill one bucket, you can then let the overflow fill up the next with what I like to call the Waterfall Technique.
Basically, you’re letting it rain! When you bring in more money than you need, you overflow the current bucket and let that waterfall flow down to the next, then the next, then the next.
In practice, you get this:
Essentials > Necessities > Optional > Cushion
For example, take that $2,000 a month we had in the last point. $1,000 of that is allocated to essentials like rent. So….you fill that bucket first. The first $1k you make in a month goes into the Essentials bucket for next month (you’re planning a month into the future and living off last month’s income, remember?)
Anything you make over $1k now goes into the Necessities bucket till it’s full, spilling down in a waterfall. When Necessities is full up, that waterfall pours into Optional. And then Optional overflows into Cushion.
Huzzah!
5. Create a Cushion
And oh, that cushion! This is critical for managing an irregular income.
When you were getting set up, you used your emergency fund to take care of that first month. So you need to rebuild your fund and keep on saving. This gives you some stability and ability to smooth over a low-income month or two, as well as handle any emergencies or rough patches that arise.
Because we all know, shit gon’ happen.
At first, your cushion will be the last bucket you fill – you have to keep the lights on and pay the mortgage and keep the cat in gooshyfood, after all.
Later on, when you’ve established some good data points, know basically what the rhythms of your irregular income look like, and have a nice lil’ financial cushion already in place, you can consider whether you want to fund your cushion first, before even Essentials, or if you want to bump it ahead of Optional (which is what I typically do).
Just make sure you’re always funding your cushion. It’s gonna be what saves you when Murphy’s Law inevitably gets out the hammer.
6. Use Smart Tools
Always know where your money is, as well as where it comes from and where it’s going.
How you do this will look different, depending on your preferences. Some people like a connected app like Mint or Yolt to track all their accounts, spending, income, etc. Other people swear by text tools like Charlie, or prefer to use their bank’s native app.
Some folks like an old-school spreadsheet, or a paper budgeting book.
Whatever works for you, do it. Just make sure all the pieces talk to each other. Keep tabs on your freelance or gig income in comparison to your spending, everywhere it occurs – credit and debit cards, cash, autopays, the works.
It’s really really easy to screw up and overspend when you’re not looking at every element – did you spend too much on the business this month and not book enough billable hours? Is there an autopay you forgot about? Using smart connected tools can help avoid a shock or, worse, an overdraft or budget crisis.
Action Steps
- Get to know your resources. What do you have available to start with and what’s your bottom line on expenses? How much are you working with going into to his and what’s the last you can spend next month?
- Set up your buckets. Figure out how you’re allocating next month’s spending based on this month’s resources or income.
- Pick a money management app. Play around with a few and start using the heck out of the one that clicks with you best.
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