Do you have an income that fluctuates, meaning you get paid a different amount every single paycheck?
If that sounds like you and you have a hard time figuring out how to budget your money, then this blog post is for you.
In this blog post, we will show you 5 easy steps to build a budget if you do not have a steady income. But before that, let’s look at some of the challenges you might face when trying to budget with a fluctuating income.
One of the biggest challenges you might face is not knowing how much money you will have coming in from one paycheck to the next. This can make it difficult to budget your expenses and can lead to overspending. Another challenge is trying to save money when your income fluctuates. It can be difficult to put away money into savings when you don’t know how much you will have coming in from one paycheck to the next.
How to build a budget if you do not have a steady income?
Now that we’ve looked at some of the challenges you might face when trying to budget with a fluctuating income, let’s look at 5 easy steps you can take to build a budget.
Step.1: Calculate Your Bare Minimum Number.
When it comes to building a budget with an irregular income, it’s essential to start by calculating your bare minimum number. This is the amount of money you need to cover your basic needs, such as housing, food, utilities, and transportation. It’s crucial to know this number because it provides a starting point for creating a budget that works for you.
To calculate your bare minimum number, you first need to create a list of your essential expenses. These are expenses that you cannot do without, such as rent or mortgage payments, groceries, and utilities. Make sure to include all the essential expenses you have in this list.
Next, add up the total cost of your essential expenses. This will give you your bare minimum number, the amount of money you need to cover your basic needs each month. It’s important to note that this number should not include any discretionary expenses, such as dining out, entertainment, or shopping.
Once you have your bare minimum number, you can start to build your budget. This number should be your starting point for creating a budget that works for you, even if your income is irregular. By prioritizing your essential expenses and knowing how much you need to cover them each month, you can make informed decisions about how to allocate your income and make sure that you are meeting your basic needs.
Step.2: Put at Least 30% Away For Taxes.
The second step in building a budget with an irregular income is to put at least 30% of your income away for taxes. This may seem like a large percentage, but it’s essential to ensure that you have enough money set aside to pay your taxes when they are due.
When you have a regular income, taxes are usually taken out of your paycheck automatically. However, when your income is irregular, you are responsible for setting aside enough money to pay your taxes at the end of the year. It’s important to note that if you don’t have enough money set aside to pay your taxes, you may be subject to penalties and interest charges.
To determine how much to set aside for taxes, you should first estimate your total income for the year. This can be challenging with an irregular income, but you can use your past income as a guide. Once you have estimated your income, you can multiply it by 30% to determine how much you should set aside for taxes.
It’s a good idea to keep your tax savings in a separate account to avoid spending it accidentally. You can also consider setting up quarterly tax payments to help spread out the cost and avoid a large tax bill at the end of the year.
Step.3: Build a Savings Buffer For Your Bills.
The third step in building a budget with an irregular income is to build a savings buffer for your bills. This buffer is a safety net that helps you cover your bills during times when your income is lower than expected or when unexpected expenses arise.
To build a savings buffer, start by calculating the total cost of your bills for the month. This includes all essential expenses, such as rent or mortgage payments, utilities, and groceries. Once you have your total bill amount, multiply it by three. This will give you the amount you should aim to save in your buffer.
It’s important to note that building a savings buffer takes time, so don’t be discouraged if you can’t save the full amount right away. Start by setting aside a small amount each month and gradually increasing it over time.
One way to build your savings buffer is to automate your savings. Set up an automatic transfer from your checking account to your savings account each month. This will help you save consistently without having to remember to do it manually.
Having a savings buffer for your bills provides peace of mind and helps you avoid late fees or missed payments. It also gives you flexibility in your budget, allowing you to adjust your spending during lean months without having to worry about falling behind on bills.
Step.4: Create a Business Account and Pay Yourself a Salary.
The fourth step in building a budget with an irregular income is to create a business account and pay yourself a salary. If you are self-employed or have a side hustle, separating your personal and business finances is crucial for the financial organization and success.
Start by opening a business account to keep track of all your income and expenses related to your business. This can be a separate checking or savings account, or even a credit card specifically for business expenses. Make sure to keep all receipts and records of business-related expenses, as these can be used to offset your taxable income.
Next, determine a reasonable salary for yourself based on your business income and expenses. This salary should be consistent with your bare minimum number calculated in step one. By paying yourself a salary, you can ensure that you are meeting your personal financial obligations while also leaving enough money in the business account to cover future expenses and investments.
It’s important to note that paying yourself a salary can have tax implications, so it’s a good idea to consult with a tax professional or financial advisor to ensure that you are handling your business finances correctly.
Separating your personal and business finances also allows you to track your business’s financial health separately from your personal finances. You can use financial software or hire an accountant to help you track your business income, expenses, and profit margins.
Step.5: Live off Last Month’s Income.
The fifth and final step in building a budget with an irregular income is to live off last month’s income. This is a budgeting strategy known as the Zero-Sum Budget, which involves using the income from the previous month to cover the expenses of the current month.
Living off last month’s income is a powerful way to break the cycle of living paycheck to paycheck. It helps you prioritize your spending and ensures that you are living within your means. To implement this strategy, start by creating a budget for the upcoming month based on your estimated income and expenses. Then, use the income from the previous month to cover those expenses.
To make this strategy work, it’s essential to have a savings buffer in place for unexpected expenses or income fluctuations. This is why the previous steps of building a savings buffer and putting money aside for taxes are so important.
Living off last month’s income can also help you build savings and reduce financial stress. Any extra income you earn can be used to build your savings or pay off debt, rather than being used to cover immediate expenses.
To ensure that you are living off last month’s income, you may need to adjust your spending habits and prioritize your expenses. Consider cutting back on non-essential expenses or finding ways to save money on essentials, such as groceries or utilities.
The Bottom line
Building a budget when you do not have a steady income is crucial to managing your finances effectively.
By following these steps, you can create a budget that works for you, even if your income is not consistent. With a solid budget in place, you can save for emergencies, pay off debt, and work towards your financial goals. Remember, building a budget is a process that takes time and effort, but the rewards are well worth it in the long run.
I hope you guys enjoyed reading this blog post. Tell us in the comment section what you think.