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How to budget effectively when you’ve got an unpredictable income

We all know that keeping track of your income and outgoings with the help of a written list or budgeting app (or even a spreadsheet!) means it’s easier to pay off any debt or work towards saving goals.


But what happens if your income changes from month to month?

Whether you’re a freelancer, business owner or you earn commission, budgeting on an unpredictable income can be a challenge.

You might have one month where you’re barely earning enough to pay your bills and another month where you’re living the high life and looking at mansions on Rightmove.

If your income is unpredictable and creating a budget seems like an impossible task, here’s our guide to pulling it off.

Start with your outgoings

You might not know how much you’ll earn each month, but you should have a good idea of your expenses.

Calculate how much you need for your essential living costs such as rent/mortgage, bills, travel costs and food.

Once you have this figure in front of you, it should give you some clarity and maybe even peace of mind.

Next, tot up how much you’d like to devote to non-essential costs such as entertainment and socialising.

For your income to be sustainable, you’ll need to make enough to cover non-essential costs as well as the vital stuff.

It’s normal to have months where you’re only just getting by, but if you have too many months like this, you may wish to look for new sources of income.

You might have one month where you’re barely earning enough to pay your bills and another where you feel you’re living the high life

Be realistic

One of the riskiest things you can do is start each month assuming it’ll be your most profitable one yet.

We’re all for being optimistic and believing in yourself, but when it comes to managing your finances, you need to be realistic and prepare for late payments, cancelled projects and unexpected expenses.

But when you first start budgeting for an irregular income, it’s wise to start with your lowest monthly estimate. That way, you’re better prepared for whatever the month throws at you.

Expected vs Real income

There are so many ways you could lay out your budget, but one of the most effective for managing an unpredictable income involves adding two income columns instead of one.

Label the first column ‘Expected Income’ and fill that out at the beginning of the month. Label the second column ‘Real Income’ and complete that once you’ve been paid.

This method should make your budget easier to manage while also helping you chase unpaid invoices or unexpected payment differences.

Saving a percentage of your income from busier months so it can be used during quieter periods can make a world of difference

Plan ahead for seasonal fluctuations

If your income is affected by seasonal changes, this needs to be reflected in your budget.

Saving a percentage of your income from busier months so it can be used during quieter periods can make a world of difference.

When business is quiet, try to get ahead on the tasks you usually struggle to find time for. Could this be the time to get your self-assessment done, improve your website or search for new clients?

Build an emergency fund

As tempting as it may be to treat yourself during times when there’s good money coming in, resist the temptation to splurge.

Instead, use these months to build up an emergency fund to tide you over when income is low. As a rule of thumb, aim to have between three to six months expenses set aside for emergencies.

It’ll take time to save this money but by making this emergency fund a priority, your future self will thank you.

Budgeting on an unpredictable income can certainly be challenging but by following the tips above, being proactive whenever possible you can make your life a bit easier.

With the help of a budget, you can tell your money where to go instead of wondering where it went.

Don’t forget that while you may think that this article is brilliant, it is intended for information purposes only and should not be mistaken for financial advice or recommendations.

3 things to do
right now

1

Be patient. It can take a few months to find a budgeting system that works, and that’s if you have regular income. Don’t beat yourself up if you’re struggling to make a budget stick. It takes time. Stick with it and it will pay off.

2

A lot of people say they can’t save because they don’t have any cash left at the end of the month so  pay some money into a savings account each month when you pay your bills.

3

Try the 50/30/20 flexible approach to budgeting: 50% of your take home pay goes on essentials, 30% goes towards fun and 20% goes to the saving. If this split doesn’t work for you when money is tight, you can adjust the ratios as you go.

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