How to Make a Budget with an Irregular Income

Updated Sep 02, 2020 | Chris Petrie

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There are those who get paid the same amount each month, and then there are people like yourself. 

Maybe you’re a real estate agent, sales professional, a freelancer, self-employed independent contractor, or any type of an entrepreneur. As you are well aware — your monthly income is always different.

So how do you budget with an irregular income?

Unlike that of a W-2 employee, you don’t have the luxury of knowing when you’re getting paid and how much to expect each week, month, or even year. Regardless of how you are paid, you still need to be living on a written plan for your money.

Free Budget Templates: Grab the budgeting templates and download the how-to-budget mini course here.

Create Your Monthly Budget First

If you haven’t already created your monthly budget, you’ll need to do that first. I have already put together a simple guide to creating a monthly budget on the blog. Make sure you go through each step and create your budget first. Then when it’s time to enter your income into your budget, revisit this post and follow the steps below.

You can also use irregular income with the simple 50-30-20 budget strategy (made popular by Elizabeth Warren).

Once you have your monthly budget set up, here are the steps to determining how to manage your budget with an irregular income.

Step 1: Determine Your 90-day Average Income

As you may recall from the 7 steps to creating a budget post, step one was to go back 90 days worth of expenses. This gives you a better snapshot of all of your expenses spread out over three months. 

For those with variable income, you are going to do the exact same thing using your income. Simply add up the past 90 days worth of income and divide it by three. This will give you a monthly average income.

Example: In January you earned $7,000, February you earned $3,000 and March your earned $8,000. Your total income over three months is $18,000, which averages out to be $6,000 per month.

Step 2: Create Your Take-Home Pay From Your Average Income

Now that you have your average monthly income, next you will determine how much of your income is “take-home” pay.

If your income is the same as your take-home pay, then you can skip down to step three.

But if you’re an entrepreneur, a freelancer, or someone who receives a 1099, then you are well aware your income is different from your take-home pay.

As an entrepreneur, I set aside a certain amount each time I get paid for taxes, profit, business expenses, and compensation. Currently, I take 35% of my income as compensation — also known as take-home pay.

Example: Income is $10,000 for the month and I choose to pay myself 35% of my income as take-home pay. Therefore my take-home pay is $3,500. If I chose to pay myself 60% of my income, then my take-home pay is $6,000.

Step 3: Open a Separate Checking Account for Your Income

This step is often overlooked, but I can tell you from years of experience this is extremely important.

You will want to open a checking account at a separate bank from where you do your everyday banking. A great place to park your total income could be an online bank such as Capital One 360, Ally Bank. If you’re looking for something local to where you live, I would highly suggest opening up an account at a local credit union.

Why Open a Separate Checking Account?

Out of sight and out of mind. Did you know the majority of Americans look at their bank accounts multiple times per day? 

If you don’t have a separate checking account at a different bank, chances are much higher you are going to rob yourself from your income account. By opening up a separate checking account at a different bank or credit union, the account has two jobs: hold onto income and pay you each month.

Step 4: Choose Your Paydays 

Now that you have determined your average monthly take-home pay, you need to determine your paydays.

There is no right or wrong way to do this. Some people like to get paid bi-weekly while others will pay themselves on the 1st and 15th of the month. You could even pay yourself weekly or monthly if you’d prefer.

I personally have always paid myself from my income account on the 1st and 15th of every month.

Whichever you prefer is totally up to you, but pick a pay schedule and stick to it.

Step 5: Enter Your Take Home Pay Into Your Budget

Now is the time you will go back to the budget you created here and enter your “take-home” pay into your income. 

Remember, you are creating a zero-based budget BEFORE the month begins. This means you are going to determine your monthly income and where all of the income will be spent (or saved) before the month begins. Therefore, the first month may be a trial month since more-than-likely you’re reading this sometime in the middle of the month.

Your Income This Month is Take-Home Pay For Next Month

A W-2 employee knows how much they are going to earn in the month before they are ever paid. You don’t have this luxury.

Therefore, your average monthly income based on the past three months will be used for the upcoming month.

Example: January you earned $7,000, February you earned $3,000 and March you earned $8,000. Your average monthly income is $6,000 and will be used for your April budget.

Step 6: Re-Adjust Every Month

Each month you will be adjusting your average monthly income based on the past 90 days. If it’s the last week of August and you’re getting ready to create September’s budget, then you will look at the income you have received for June, July and August. Average those last three months and use this as take-home pay for September’s budget.

The following month, you will use the average income of July, August and September and plug this into your October budget. Rinse and repeat each and every month to determine the take-home pay for each month’s budget.

Click Here for the Free Budget Mini Course: Download the free budget forms and then watch me show you exactly how create your own budget!

Summary

Often high-income earners are those who are self-employed, entrepreneurs, and have a variable income each month. With that said, a recent study revealed that 25% of those making $150,000 or more are living paycheck to paycheck. 

This is because they are not living on a plan for the money in their lives. What gets measured gets managed, and this is especially true for those with variable monthly income. 

Some people will get to the end of the year and say “we made this much money and we have no idea where it all went”. However, those who choose to create a budget and stick to it will know exactly how much they made…and will know exactly where it all went.

Frequently Asked Questions

What if I didn’t get paid in the past 90 days?

This is more common than you think. I was working with a travel agent and she may go five months without getting paid and then month six she gets a huge lump sum. If you are similar to this example, I would recommend using a 6-month average versus a 3-month average.

What if my average income drops below my expenses for the month?

This may happen when you first start your budget and that is okay. You can do a few things here to adjust. 

One idea is to increase your owner’s compensation (take-home pay) from your total income. If this isn’t an option, then you will need to revisit your budget and start looking at needs versus wants.

How should I account for taxes?

Just like a W-2 employee, we are accounting for taxes already. A W-2 employee has all taxes taken out prior to receiving their “take-home” pay. You are essentially doing the same thing by depositing all of your income into a separate bank account and determining how much you will take as owner’s compensation.

A good rule of thumb for those who are entrepreneurs, freelancers, or any kind of 1099 contractor is to set aside money for taxes every time you are paid. Everyone will be a little different, so reach out to a trusted tax-accountant to determine the percentage to set aside each month.

Any other questions?

Feel free to add a question in the comments section below and I will respond and add your question to this post.


Get the Budget Templates Right Here

Now that you have a pretty good idea of how a budget works, I am going to give you the budget templates and walk you step-by-step with how to use them. If you have any questions at all, please post in the comments section below.

Good luck and congratulations on creating your budget!

Chris Peach Author 150x150

Chris Petrie

Chris (Peach) Petrie is a personal finance expert, money coach, speaker and podcaster.

In 2011, Chris and his family were exhausted from living paycheck-to-paycheck and facing a mountain of debt. They started going against the society standards of misbehaving with money and made the decision to take back control of their lives and money. Within seven months they paid off $52,000, started saving like crazy and began building real wealth.

The word spread fast and Chris started showing friends how to create a budget over dinner. Soon after he started showing their friends how to do the same and eventually Chris started teaching personal finance classes around the community. As the need for the classes grew, Chris launched Money Peach in 2015.

Money Peach was created to help everyday people remove the stress and fear of money by showing them how to save more, make more, and keep more of their money.

Chris Peach has been featured in places like Business Insider, The Huffington Post, Elite Daily, and CheddarTV.

When Chris isn’t at “work” he can be found at the Crossfit gym or riding on the fire truck — Chris is also a full-time firefighter in Phoenix, Arizona.

11 Comments

  • This is great in theory but what if you don’t make enough to have an additional month on the side? If you barely have enough to scrape of incidentals, what are your options?

    Part of our income is steady but it doesn’t cover everything. Then another chunk of it is commission based. There are some months where that commission is 0. At this point in time, having that extra month is not going to happen so this plan won’t really work for me.

    I don’t know if I am doing the right thing or not but I work in two week increments but have multiple weeks of budgets ready so I can see if I am going to be short one week and I check to see if I can borrow from the week before. Regardless, I always seem to go over no matter how hard I try to prepare. Something always comes up that wipes out anything I’ve put aside. There are times where I’ve even made huge headway on my credit card debt only to have to use the same credit card to handle some emergency. I just don’t have enough extra to play with.

    Reply
    • I used to feel that way too. I guess the key to fixing that problem would be to take on a side hustle (at least temporarily) to help you build up a buffer. Do you have time for one alongside your job? That’s what really helped me start getting ahead of my bills and the little things that pop up too.

      Reply
  • Nice article, and awesome topic. I agree that the more irregular your income, the more important it becomes to know exactly where your money is going. At the very least it will help to normalize your expenditures by living your life on less than your best-income months. Doing this will also help you to save more than you probably otherwise would.

    I just found your blog this evening – great work! I’m definitely going to be a consistent reader. 🙂

    Reply
    • Thanks so much Steve! I’m glad you enjoyed it. I’ve found that an irregular income doesn’t have to be scary, but you definitely need to budget off of a lower number than your highest monthly income that way you aren’t in trouble if your income is lower than expected.

      Reply
  • Good to know that you view as some random guy you met at a coffee shop 🙂

    Welcome aboard Kayla!

    Reply
    • Thanks Deacon! 🙂 It was nice to run into you at FinCon a couple of weeks ago.

      Reply
  • I like the idea of living off last month’s income. I keep a separate account that I have buffered for the year so I simply transfer over to my checking exactly what we need for the month. That way I won’t be lured into spending more than needed for a month.

    Reply
    • That’s a great idea Steve! I’m glad you are on board with living off last month’s income. I think it’s a great way to do things too.

      Reply
  • Great tips. We focus more on tracking than budgeting, but we have a regular income and have most expenses in frugal mode. I’ve always wondered how to budget as a freelancer or other irregular income, and living on last month’s pay seems like the best approach.

    Reply
    • Hey Kalie, when I had a regular/steady income I mostly tracked expenses too. I did make a monthly budget, but I already knew exactly what would be coming in and what would be going out of my account every month. Irregular income makes it harder, but it can be done.

      Reply
  • Creative ideas , I was enlightened by the details . Does anyone know if I might grab a fillable a form example to complete ?

    Reply

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