How to budget on an irregular income

Budgeting as a freelancer, contractor or someone with an unpredictable payslip can seem like an impossible task, especially if your income fluctuates. You might feel like you’re constantly chasing the next payment, so the process itself can feel incredibly daunting.

In this article, we’ll explore simple strategies for creating a financial plan that works for you. Plus, we’ll discuss some options that could help stabilise your financial situation and make budgeting easier.

The first step to budgeting for an irregular income is understanding what you can realistically expect to earn over time.

Start by looking at the past six months to a year. Add up your income each month and then divide that total by the number of months you’ve reviewed to get an average.

While your earnings might fluctuate from one month to the next, knowing your average helps you set realistic expectations. Instead of budgeting for an amount you hope to earn, you’ll have a solid foundation to base your spending and savings goals on.

It’s so important to make sure your essential expenses are covered first, no matter what. This includes things like rent or mortgage payments, utilities, food, insurance, and any other non-negotiable costs.

To ensure your essential expenses are met, create a list of all your monthly commitments. Prioritise them based on importance – these are the items you must pay for every month, regardless of your income level.

Once your essentials are covered, you can turn your attention to discretionary expenses like entertainment, eating out or shopping. If your income for the month is lower than usual, you can cut back on these variable costs without affecting your ability to pay for necessities.

An emergency fund is key when your income is unpredictable. It acts as a safety net, offering you peace of mind when lean months arrive. Without it, a dip in your earnings could lead to financial stress or even missed payments.

A good rule of thumb is to aim for three to six months of living expenses in your emergency fund. While this may seem like a large amount, don’t be discouraged – it’s fine to start small. Set aside a portion of your income each month and gradually build your fund over time.

Having that buffer can give you the financial flexibility to ride out the slower months.

The zero-based budgeting method means you allocate every penny you earn to a specific category until you have no income left unaccounted for. The goal is to “zero out” your budget, ensuring you know exactly where your money is going.

Using this method, you can plan for slower months by setting aside money for savings or cutting back on discretionary spending when needed.

Zero-based budgeting works well for those with fluctuating incomes, as it ensures every penny is working hard for you, regardless of how much you earn.

One of the best ways to plan for variable costs is by setting flexible categories in your budget. Start by tracking how much you’ll typically spend in these areas and then estimate a reasonable amount for each category based on your income for the month.

Take a closer look at any subscriptions or non-essential services you may be paying for, like streaming services or gym memberships that you don’t use. These are the types of expenses that are easy to trim when times are tight.