Budgeting is never really a ton of fun, even though setting up a realistic budget and then sticking to it is pretty much the best thing you could ever do for your finances.
There are all kinds of resources for setting up a budget, but I’ve found that a lot of these are based on the steady monthly paycheck.
And that’s great if you’ve got a steady monthly paycheck… but what about people like me, who have an irregular income?
This is actually an age-old question. Tons of people holding service-based jobs have had to figure out how to budget on an irregular income since pretty much forever. Think about restaurant servers, car salesmen, and real estate agents. There’s no salary there. Never really has been.
But the topic has been given a lot more attention in this day and age of contract workers, freelancing, and side hustles… not to mention personal finance bloggers.
And because so many of us have irregular incomes now, there’s a lot of talk about how to manage those irregular incomes -- paying off debt, avoiding more debt, building savings, doing some investing, and oh yeah, living a nice life here and now.
I’ve read up on this topic a lot because it hits so close to home. I hope to spend the rest of my life on an irregular income, in a sense. A reliable one, sure, but not necessarily identical from one month to the next.
There are tons of good books and resources out there that can help you manage your money and pay off debt, even if you have an irregular income. You can learn pretty much anything you want nowadays on the internet, so don't be afraid to use it!
But if you want to jump in and do your budget DIY-style, here’s some of my best advice.
Your budget is a tool, and the “sharper” this tool is, the better it will work for you. Keep your budget categories super-specific, especially if you’ve never really paid attention to your spending before.
For example, you could have a grocery line, a household line, and a restaurant line. Sometimes household stuff (like batteries and dish soap) comes out of the grocery budget because those things might get bought at the same place. And groceries and restaurants are both food-related, but they’re pretty different. You might even want a separate category just for fast food, or “workday lunch,” or whatever you want. Just be specific!
I also want to note right here that you need to budget for what my grandmother calls “mad money.” This is money that you get to spend however you want, whenever you want. (When it’s gone, it’s gone… but until it’s gone, there are no rules!). You need to be able to have some fun when you’re on a budget.
Whether you’ve got a side gig in addition to your day job, you’re juggling multiple part-time jobs, or you’re a full-time freelancer, a hugely popular (with good reason) way to budget is to base your budget on last month’s income.
This is especially nice if your income lands in the same ballpark each month or it’s steadily growing, but it will still work if you have a good feel for your income swings and can set aside money during the high months to float you during the low ones.
The drawback to doing it this way is that you’ll have to sit and recalculate your budget each month. But once you get the swing of things -- and budgeting is a skill that is learned, just like anything else -- it’s not too hard. Most categories will stay more or less the same.
Pro tip: include an “everything else” envelope! You never know when you’ll need that one!
A zero-based budget will essentially give a specific job to every single dollar you earn. When you’re using last month’s income, you must find a job for every one of those dollars.
Sometimes -- a lot of times when your income is pretty irregular and you’re dealing with a high month -- that job might need to be going into the bank for the next month if you’re expecting a lower month in the near future.
Zero-based budgeting (sometimes called zero-sum budgeting) can seem a little weird if you’re unfamiliar with the concept.
If you set up your budget based on what you actually need (and maybe a bit of what you want), you’ll find that your total “needed” budget might be lower than your average monthly income. This is awesome! It means you can put the extra money toward debt payments, savings, or investments.
If you start the other way around -- by saying you have X dollars to spend and then figuring out how to spend them -- you’ll be more likely to overspend. It’s much more effective to figure out how little you can live on, and put the excess to work (either by saving/investing it or rolling it toward debt).
Seriously. The green paper stuff that nobody carries around anymore.
If you’re serious about managing your money, put yourself on a cash budget. Nothing will bring you face-to-face with your spending habits (good and bad) than by having your little folio with its envelopes full of cash.
The great thing about a cash budget is that there’s no way to blow it. Once the money in any given spending category is gone, it is literally gone. There is no more money to spend. All you have to do is NOT whip out some plastic.
Plus your bank teller will be charmed and bewildered when you make a withdrawal for “four $100 bills, eight $50 bills, eighteen $20 bills, and four $5 bills.”
When you’re on a cash budget, there were a few things that aren’t paid with cash. Rent or mortgage payments are usually made via check, PayPal, or automatic withdrawal from your checking account. Online shopping makes it pretty much impossible to use cash, too. Here’s how you work around that:
The steady electronic payments (like a mortgage and health insurance premiums), just leave them as-is. Don’t get that cash from the bank and then put it right back in, because that would be weird. Instead, mark it down on your budget as “paid” at the beginning of every month. Same for car payments and whatnot.
For savings and investments, set up automatic drafts to take money from your checking to your savings account(s) (or do it manually when you set up your budget each month).
For everything you buy online, remove the cash from that envelope and put it in your “back to bank” envelope.
And for everything else, buy in person and pay with cash!
Pro tip: Have an envelope in your budget wallet with twenty $1 bills in it. That way, you’ll always be able to break a $20 when you buy something online.