I’m in my 30s, and I’ve never had “salary certainty.” That is, I’ve never had a definite (or even approximate) sense of how much money I’m going to make in a given year.
From teenage camp counselor to professional actress to full-time entrepreneur, inconsistent, unpredictable income has always been a fact of my financial life.
Even as my income has grown, the uncertainty of cash flow remains. (Turns out it doesn’t matter how many thousands of dollars are “on the way” if none of them are in your bank account when it comes time to pay your quarterly tax bill.)
How To Budget Your Money With Inconsistent Income
To manage my cash flow with irregular income, I’ve mastered a variety of techniques to stay solvent in the short term while also staying accountable to my big picture goals.
In this article, I’m going to walk you through four ways to budget with inconsistent income. These strategies can be used individually, they can be mixed and matched or they can be implemented all at once.
The objective is to create a framework that helps you feel financially secure even without salary certainty. These tips address long-term financial plans such as paying down debt and building savings while still meeting your monthly needs.
1. Live on Last Month’s Income
Instead of trying to guess what you’re going to make this month and budgeting from that projection, use your actual earnings from last month to set the parameters for your spending this month.
I use my total income at the end of each month as a guide to map out my spending and savings plan for the next 30 days. That way, I stay grounded in the reality of my means even when I don’t know what my means will look like going forward.
But what happens if you don’t earn enough one month to cover the cost of your necessities the following month? And what is “enough” anyway?
That brings me to the next way to budget with inconsistent income.
2. Know Your Make or Break Number
What is the minimum cost to run your life each month? That’s your make or break number.
To calculate your make or break number you need three totals:
- Your monthly bare-bones budget total. This is the cumulative cost of your monthly necessities: anything you need to live and work normally such as housing, food, insurance and transportation. There may be other things you add to your own list. Remember to include any irregular (but necessary) expenses in your total. To budget for your annual property taxes, for example, you would divide by 12 and add that amount to your monthly budget. For a quarterly insurance payment, divide by three.
- A bare-bones budget buffer. Take your monthly bare-bones total and add a budget buffer of at least 10%. Life is always more expensive than we anticipate.
- Monthly financial targets. What are your long-term financial goals? Paying off student loan debt? Hitting a retirement savings target? Saving up for a down payment on a home? Taking a vacation next summer? Get grounded in the numbers needed to achieve your goals, then break each one down into a manageable monthly mini-target. If that adds up to more than you can afford, prioritize the goals that are most important to you and add the others into your plan as you’re able.
Monthly bare-bones total + budget buffer + monthly financial goal targets = monthly make or break number
Your make or break number, calculated in this fashion, is a benchmark for the financial viability of your life.
I like this system because it makes your long-term financial goals as non-negotiable as your necessities. If you find yourself having to prioritize elements of the make or break number over others — for example, transit costs over retirement contributions — you have reached a “break” point. That leaves you with two options: reduce your bare-bones expenses and/or increase your earnings.
When you have inconsistent income, knowing your make or break number is critical, as it tells you exactly how much you need to earn to have “enough” each month.
To budget with your make or break number, simply subtract it from your previous month’s income.
You’ll then know how much you have left to dedicate toward discretionary spending, like eating out and buying gifts, or how much you can devote to supercharging your financial goal getting.
3. Try Zero-Sum Budgeting
The make or break number offers a lot of budget flexibility.
Basically, as long as your earnings surpass your make or break point, you can spend your money any way you like.
If, however, you prefer a bit more structure or you want to ramp up a certain savings goal, consider the zero-sum budgeting technique.
Zero-sum budgeting gives every dollar you earn a destination. And that reduces the likelihood of preemptive spending on fleeting luxuries when you’re trying to save for big picture priorities.
Here’s how it works: Write down your last month’s income on a piece of paper, then subtract your bare-bones budget total.
With the remaining earnings, allocate specific dollar amounts for discretionary spending and your monthly financial goal targets (as defined in your make or break number plus anything else you’d like to fund). Do that until you get down to zero — with every dollar accounted for.
For example, if I earned $3,500 last month and my monthly bare bones total is $2,500, I now have $1,000 to designate between my wants and my goals. Instead of just letting my spending play out as the month progresses, I can use a zero-sum budget to set my spending and savings intentions at the start.
For example, I might allocate that $1,000 as follows: $150 for short-term/emergency fund savings, $500 for retirement savings, $100 to the vacation fund, $200 for entertainment and $50 for gift giving.
To hold myself accountable, I can then satisfy my financial goal targets immediately. I fund my financial goals at the beginning of the month because I’ve already calculated exactly how much I can afford to contribute to them.
With those dollars already set aside, I’m much less likely to overspend on things that aren’t necessities.
By accounting for every dollar, zero-sum budgeting adds an extra layer of accountability to achieving your financial goals, even when you don’t have consistent earnings.
4. Use an App
If you want even more accountability to your spending plan, or, if by contrast, you’re struggling to implement any of these techniques, try downloading a smartphone app that tracks your spending, like Mint.
In my opinion, tracking your spending is the single most effective thing you can do to transform your financial life — regular income or not. It fosters mindfulness around your money and shows you exactly where you stand financially. And that means you give yourself a no-nonsense indicator of how your present financial picture compares to your desired financial future.
I’m a big fan of apps because they make your financial picture mobile. It’s like having a tiny scale in your pocket as you’re working towards a fitness goal. If you step on the scale in a moment of decision — when considering a second glass of wine or piece of chocolate cake for example — and find yourself already teetering on the edge of your target weight, you’ll probably have an easier time saying no to the extra indulgence, keeping you accountable to your long-term fitness goal.
Similarly, an app that tracks your spending can offer accountability for your budget. In the moment of decision, you can quickly check your smartphone to assess whether your spending choices are something you can actually afford and still meet your long-term financial goals.
1. Be Patient
It can take anywhere from three to six months to find a budgeting system that works — even if you have a regular income. Don’t beat yourself up if you’re struggling to implement one of these systems effectively. It takes time. Stick with it, and I’m confident you’ll reap the benefits.
2. Be Flexible
What I’ve outlined here are merely suggestions: frameworks for getting started. It’s up to you to fill in your personal framework with budgeting strategies that work for you. Feel free to experiment and play around with new techniques (and share any you find useful in the comments).
3. Build a Healthy Cash Cushion
As you’re considering financial targets to include in your make or break number, be sure to account for a healthy emergency fund (a 3-6 month cash reserve).
For those with inconsistent income, I recommend an even greater cash cushion: 6-9 month’s worth of expenses in savings.
I know it’s daunting, but you don’t have to do it all at once. Once you get an initial emergency fund in place, you can add to it gradually.
Having that cash cushion will give you security and peace of mind when work dries up or paychecks take an extra six weeks to process or whatever else might interrupt your cash flow.
Whatever you do, do not use inconsistent income as a crutch or justification!
You can enjoy financial freedom with irregular income, as long as you continue using tools and strategies to build the right financial framework for you.