Irregular income occurs when you receive payments that vary, possibly every single time, and on either a consistent or inconsistent basis. That may mean for commissioned salespeople they are paid monthly based upon their sales the previous month, or someone in retail may be paid weekly but only based upon their work schedule that week.
What about Budgeting?
When you work under conditions like this, budgeting can be vital from having one month where you could potentially buy a brand new car, and another when you are living on rice and beans, which gets old quick. When monthly income varies, you can look either ahead and plan for future expense.
Sometimes you may also get an influx of cash that you did not expect, such as a donation, winnings, or an inheritance, and it is better to have that unaccounted money allocated and not receive it, than blown on nothing tangible before you realize what you have lost.
Sure, but how can I know?
Being salaried, I have a set amount I am paid every two weeks, which allows me to budget based upon when those payments come in. It also means that 2 months a year, I have what I love to call “magic months” when I receive 3 paychecks in a month, as opposed to the normal 2. I have to be very specific and budget those in just the same as every other paycheck, making sure that every single dollar has a name before I receive it.
However, I also receive a bonus that changes from year to year, and have income from refereeing Wheelchair Rugby that depends on the number of tournaments I officiate, and the number of games at each tournament. This irregular income needs a place to go, and the legal pad list outlined below will help you get there.
The Legal Pad List
There are many high-tech ways to budget, either on the computer, with an app, quantum physics, you know, the usual, but you can always boil it down to the basics: a piece of paper and a pencil. Starting here, you list out all of the payments you need to make, including for the month directly ahead, and also for the year ahead.
If you don’t look far enough forward, you may not be prepared when you have less coming in than going out in any given month. It is also necessary to prioritize that list, and then slowly work your way down it when the money comes in. These steps should help in getting the most out of your legal pad list.
5 Steps to Improve your Legal Pad List
1. Put the Necessities First
This includes your “4 walls” so to speak: Food, Primary Utilities/Shelter, Clothing and Transportation. Though they are listed as necessities, that does not mean you are eating 5 course meals out each night, living in a McMansion, wearing only fresh off the runway fashions and driving a Lamborghini.
You can budget those extras in later if you want, but for now you should have a budgeted amount that you need to spend and can spend each month on these 4 items, and it should come first.
2. Next, Your Savings and Giving
The next and arguably most important part that most people forget, or put at the end of their budget, is the portion of their income determined for Saving and Giving. You need to pay yourself and give what you can before the rest of your budget is set, otherwise you will never have enough at the end of your legal pad list to make a difference.
Saving in this regard is more towards saving up for an Emergency Fund, a Retirement Account, or a College Fund. Giving can be either to charity or a religious organization you feel a connection with and want to help.
3. Regular Expenses
Regularly occurring monthly expenses or bills that include items such as payments for cell phone, debt, car payment, etc. When budgeted properly, you can avoid missing payments on these items each month, reducing the risk of interest payments or late fees.
4. Irregular Expenses
These include payments that are made on an infrequent basis, or happen only a couple times a year, such as taxes both income and property, insurance payments, Christmas/Holiday presents, travel and vacation funds, and anything else that may creep up throughout the year.
When you have extra income, you are able to set the amount needed aside in savings account ready to be used when that expense creeps up. You can also allocate it monthly, so if you have a $1,200 tax bill, you could set aside $100 a month, or $25 dollars a week to offset the large expense when it occurs.
Irregular expenses also include saving up extra in a sinking fund for other items you may want or need, such as furniture or large purchases.
5. Finally, add the Extras
Sometimes, you just have to “treat yo self” as they say on Parks and Rec. There is no shame in having a “fun” budget and spending a little extra cash received on a big month to cover a day at the spa, an extra round of golf, a new game or something else. Extra income can also be used for gifts or surprises, anything you may want to spend money on, but don’t always have the discretionary income.
Some months, you may only have enough income to cover your necessities and pay your monthly expenses, without having any extra money to eat meals out, go on a trip or have a lot of “fun” expenses.
Other months you may have more money than you have expenses for the month, and can begin to look forward using a sinking fund to save up for less often expenses or large purchases.
Not having a constant flow of income does not mean you cannot have a plan for your money. Budgeting is the first and most important step to your financial stability, no matter your income stream. Use the legal pad list to allocate properly, and plan out how any money that comes into you that is not ordinary to work most for you.
Where Did I Learn?
When I first wanted to start budgeting, I checked out a few options and ended up following Dave Ramsey for a lot of great information. His most recent edition of The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness is not your typical finance book.
It will help you reduce your debt, increase your income and have financial freedom. This is almost a must read for anyone on an irregular income, because it focuses on your priorities first as we described, then works its way down.
Have any tips or tricks that may help others work through their budget? Please share in the comments below. Everyone that knows how to budget now started off looking for information somewhere along the way. Why not share your knowledge with someone and make their life a little easier today?