How To Cope With Irregular Income

Self-employed individuals or freelancers can often face a perplexing issue of irregular income. With that, the question arises, how can one maintain a budget without fixed or consistent levels of monthly income?

It’s undoubtedly tough worrying about whether or not you will earn enough to cover the expenses each month when you are self-employed and not relying on the safety net of a fixed salary. But in this modern era, there is no such thing as stability, and as we inch closer to being in a gig economy, it’s important to learn how to cope with the potential of irregular income.

The Concept Of Irregular Income Explained

According to figures, the gig economywhich has grown 15% over the last decade, has created a new class of workers who don’t earn a steady or guaranteed paycheck from a single employer.

These workers could be budding entrepreneurs, managers of affiliate marketing websites, or even babysitters. This could also be a range of freelancers, from photographers to writers.

freelancer gig economy irregular income

While there is no real cap to how much they can earn and offers a sense of freedom to their work environment, it’s possible to deem these earnings as ‘irregular’ — varying in predictability. The resulting cash flow can make it a challenge in budgeting, as it is difficult to set a precise amount every month.

The Importance Of Budgeting On An Irregular Income

According to a 2017 report by the US federal reserve, one-third of those with irregular income admitted that they struggled to pay their bills.

As per the World Bank, the ongoing COVID pandemic has pushed an estimated 88 million people towards poverty resulting in an even worse situation for those with an irregular or varying income.  

focus photography of person counting dollar banknotes

Effective budgeting is part of building healthy financial well-being and is the only sure-fire way of coping with the economic climate’s tumultuous volatility today.  

Preparing A Budgeting Strategy

While there are several different strategies out there on budgeting, we take a look at a simple four-step strategy that can help you stay on track with finances and set up a budget easily, regardless of if you have irregular income.

1) Determine a ‘Baseline’ Estimate Of Your Least Expected Monthly Earning

Starting with a baseline estimate makes the budgeting process relatively more straightforward. When you take the least amount you expect to earn in a particular month into account, it gives you a starting point from where you can go up.

Analyze your receipts for the last year and identify the lowest amount you earned that year. If it’s your first time working in a commission or freelance-based job, estimate the lowest other within the same domain as you could be earning. 

person holding paper near pen and calculator

2) Create a Budget Based On Step 1

Once you have estimated your lowest possible monthly income, the next step is actually creating a budget. You need to figure out what you will be spending to determine how much you will need. With an unstable income, your expenses should be consistent and predictable in nature. The trick here is to guarantee that your costs are in line with the estimate you have set.

Classify your spending as per the necessities — expenses that incur every month you must have to survive. These include: 

  • Groceries — Basic daily food needs without any added snacks or drinks such as coffee or dining out. 
  • Accommodation — Include any costs incurred for accommodation, including the rent, property taxes, and maintenance.
transportation income
  • Transportation — Consider your mode of transport – car or bike, how much you spend on it, and the gas it consumes as per mileage. Do you need a vehicle and the auto insurance, maintenance, and gas expenses that come with it? Or is there workable public transport available where you live?
  • Utilities — Consider insurance, monthly electricity bills, payments for any outstanding medical bills, and the Internet, among other miscellaneous costs. 

After listing the main essentials, list the remaining expenses by prioritizing the most important to the least. In the end, whatever you write, necessities take priority, and any extra costs for leisure and entertainment are placed at the bottom, with the least priority.

3) Make Adjustments Throughout The Month

Initiate a trial run for the budget based on your estimated lowest monthly income, and if it plays out well, you might notice halfway through that you’re doing better than you initially thought you would. If the actual payment is even lower than the lowest estimate, you will need to adjust the expenses allocation. 

4) Establish A Surplus Fund

If you earned more than estimated, you can add the extra amount to the listed priorities or add other preferences. A better idea would be to establish a surplus fund that eliminates the need to withdraw from your emergency fund. 

budgeting irregular income

Anything above the baseline income target should go to the surplus fund and the emergency fund savings. With a budget, you can have monthly income targets and an idea of where the money is being spent.  

Final Thoughts

The challenges of irregular income are no reason to keep you from budgeting as soon as possible. This is a skill and habit you should begin to build as early as possible. Set aside money in the good months, and do what you can to boost the emergency funds.

As you get more comfortable doing so, you will learn to put away some extra money for investments and this can help expand your net worth exponentially in the long run.