Irregular Income

If your income varies, it often fluctuates in the following ways:

• The amount varies. You’re never sure how much you’ll be paid.
• The timing varies. You don’t know exactly when you’ll be paid.

These types of pay cycles are difficult to anticipate and take a mental toll. They leave you close to the edge without a solid way to get ahead.

Do any of these variable income situations sound familiar?

Beth, the freelancer

Beth, a self-employed freelancer, runs a successful small business. There’s no job too big or too small—she can handle it all. She loves staying busy. When it rains, it pours, with Beth sometimes juggling multiple projects at once. At other times, however, it can feel like she’ll never get a project again. The work suddenly dries up.

Marianne, the real estate Bboker

As soon as the snow melts, the “for sale” signs start popping up. It’s not unusual for Marianne to have multiple closings each week in the spring and summer. But when winter hits, sales dry up. Unfortunately, this is when the heating bill cranks up, along with snow removal. Why can’t the holidays happen during the busy season when all that extra money is around?

If you’re trying to budget in commissioned sales, we understand how the unpredictability may have thrown your monthly budget into feast-or-famine mode in the past.

Tony, the wedding photographer

June is Tony’s busiest time of year. He’s busy every weekend, with money continuing to roll in. But in March? Not so much. If he could just convince a few people to move their weddings, maybe things would change. In the summer, he can spend money on anything and everything, but in late winter, he shifts to an all-ramen diet.

If you’re self-employed or a freelancer like Tony, you might have found budgeting difficult to wrap your head around.

Seth, the science teacher

Seth was born to teach. There’s nothing he wouldn’t do for his students. He loves the schedule that allows him to share vacation days with his own children. During the year, the same paycheck hits the checking account every other Friday—no guessing required. The summer months, however, do not offer the same stable income. He knows he needs to find a way to save money for the summer, but it’s been hard to manage.

Sound familiar?

Here at YNAB, we’re big fans of budgeting—taking the money you have and deciding what you’ll do with it before you spend. We’re not big fans of forecasting.

What is forecasting? Have you sat down and made a list of all your essential expenses and matched that up with the money you think is coming in? That’s forecasting—planning ahead with monthly income that you think will arrive before the money actually arrives.

Forecasting is tempting when your income varies, but often leaves you in the rain without an umbrella.

Forecasting is a common approach when income becomes unpredictable, but it can result in a false feeling of financial control.

Forecasting in real life

Let’s say you’re a freelance designer, and you have three projects coming up. You add up the invoices and realize, “If they all pay on time, I’ll be able to cover the monthly bills and finally buy that new couch I’ve had my eye on.” Awesome. At this moment, you are feeling great.

One invoice comes in, so you pay some bills. There’s a chunk remaining, so you go out and buy your new couch and put it on the credit card. Bad news: the last invoice didn’t pay you on time. You had to send a second invoice. Your perfect plan has been foiled, and now, the phone bill is due, your amount of credit card debt has climbed, and by the time the credit card statement arrives, you wish you had waited to buy the couch.

There’s no question that you need a plan—a budget—if we may be so bold. Your plan needs to be grounded in reality. It needs to be based on the cash you have on hand.

Why forecasting doesn’t work

When you forecast, you’re making a plan for dollars that don’t really exist—at least not yet. It gives you a momentary feeling of control, but it’s false and fleeting. And especially risky with an irregular income.

After all, you can’t spend a penny of that money until it’s in your possession.

You need the clarity of finite money.

When you forecast, you imagine more money, which takes your eyes off the money that you really do have control over—the money in your possession. Even though more money is probably (hopefully!) coming, you still have to make decisions about the money you have right now.

Focusing on what you have will help you realize that your money is finite. Things may start to feel a little bit scarce. Neither of those feelings seem particularly nice, huh? Dreading this feeling is what keeps a lot of people from budgeting.

Scarcity is a powerful tool to help make your financial decisions with confidence.

Decision-making gets easier with finite money. Imagine you are hired to be the CEO of a corporation. You are about to have hundreds, maybe thousands of exceptionally diligent employees.

On the first day, you give everyone their work assignments. Each worker is given a specific job to do, and you know they’ll do it well.
Some of the workers do responsible things, but others simply make life more fun for the CEO. They organize outings, show up with coffee, and handle all the details to make your dream vacation a reality.

You decide what each worker needs to do. It takes five minutes tops, and you go on with your day, knowing the work is getting done. Sometimes, a worker will need to do a different job, and you can reassign them at any time.

Because you’ve taken your list of things that need to get done and given assignments to the workers you already have on hand, you know they’ll get their work done on time and to completion.

If you had tried to plan out the work for future hires—two weeks or two months into the future—you can understand how this would muddy the waters if workers get sick, push back their start date, or take longer on onboarding. You just have no idea what the future may bring, and planning would become a confusing mess.

When you run away from scarcity and try to forecast how much money you might have down the road, you take your focus away from right now. It’s easy to imagine more money coming later and put off prioritizing in the present.

Build your plan into a budget that you can really trust by incorporating only the money you currently have on hand. This concept is known as zero-based budgeting—and it works!

Of course, life has to be as complicated as possible. It’s not enough that your income fluctuates—your spending fluctuates, too.

While the rent and phone bill may always be the same, other expenses vary, which can make it challenging to prepare for them.

You have much more control over this than you realize. Trust us. You can get a handle on this.

Start with predictable expenses

Look at the money you have in the bank, and decide ahead of time what you want that money to do. Start with expenses that happen every single month. They fall into two groups:

Predictable Monthly Expenses

With fixed expenses, the amounts are the same and you pay them every month. You can probably figure these out quickly and may even know them off the top of your head. This is your mortgage payment or rent, your phone bill, child care, car payment, and Netflix charge. Just set aside the same amount every month and pay the bill.

Unpredictable Monthly Expenses

The amounts are not the same, but you still pay them every month. These are things like your electric bill, groceries, or gas. They’re always there, but they fluctuate.

To handle these expenses, start out by setting a little more money aside than you think you’ll need. Eventually, you’ll begin to clearly see your average monthly spending. This will help you determine if you need to budget more, budget less, or work on improving your spending habits.

Add in non-monthly expenses

As you know, not all expenses come in perfect little month-sized packages. Some are annual or just flat-out irregular. You can plan for these, as well, which is where YNAB’s Rule Two comes in: Embrace Your True Expenses. Treat each non-monthly expense like a monthly bill and set money aside each month.

Surprise, surprise—these fall into two groups, as well:

Predictable Non-Monthly Expenses

The amount of money remains consistent, but instead of paying the bill monthly, it may be annual or semi-annual. For example, your Amazon Prime membership is $119 a year, paid annually. Perhaps your car insurance premium is $750 every six months.

For those expenses, take the total and divide it by the number of months left before you have to pay the bill. If you’re just starting and there are three months until the car insurance bill is due, set aside $250 every month. In three months, it will build up to $750. By that point, you’re on a roll and now have six months until the next bill, so you’ll only need to set aside $125 each month. Just treat these expenses as a monthly bill.

Unpredictable Non-Monthly Expenses

These are the hard ones that keep us up at night: the unexpected car repair, the broken window, or the burst water pipe.

Guess what? Cars break down, windows break, and pipes burst. We may not know when those things will happen or how much they’ll cost, but we do know that it will be greater than zero.

As time goes on, you’ll learn to ballpark just how much the cat and dog cost you in vet bills annually. Gradually, things that seemed unpredictable will become easier to anticipate and manage.

When life changes, change your budget

Now, even if you implement those rules, you’ll still run into problems. Sadly, no one can predict the future with 100% accuracy. This is where YNAB’s Rule Three shines: Roll With the Punches.

Let’s say you’ve been putting $100 a month aside for car repairs. It’s been seven months, and you have a beautiful stash of $700 saved up just for car repairs. Wow. You should feel proud—this is quite an accomplishment.

When the car breaks down, the repair bill is $744.29. You may be tempted to feel like you can’t catch a break, but you actually did a great job. You just didn’t predict the future with 100% accuracy. Congrats, you are human.

Look: you’re only $44.29 short. You look around the budget and see a surplus in clothing spending. So, you move $44.29 from clothing to car repairs—problem solved. The clothes can wait, the car can’t.

Rule Three gives you a way to stay flexible and nimble, even when things don’t go exactly the way you planned.

We turned the spending roller coaster into a trip on the Hogwarts Express to the magical world of less stress.

Next, let’s turn our attention to the income roller coaster.

When your income is variable, you feel like you’re on a roller coaster. Perhaps it looks like this:

Maybe it’s worse than that, and some month’s there’s no income at all.

This is the classic feast-or-famine pay cycle. How do you break it?

Use your feast to prepare for the famine

When you’re living paycheck to paycheck, money comes in and immediately goes right back out the door. If you’re paid on Friday and spend it on Saturday, those dollars are one day old in your bank account when they are spent.

Work to expand the time between receiving and spending your money. Rather than spending money that arrived yesterday, hang on to some so you can spend last week’s money, and then maybe even last month’s money. You’ll be secure. You’ll have the stability and flexibility to respond to whatever comes your way.

If your income is “feast or famine,” maybe you spend like crazy during the feast period. Totally understandable. The best way to take advantage is to hold on to it, not spend it. How do we control the income roller coaster? By controlling the spending.

You may not know when money will arrive, but you can control how it goes out.

Here’s the first chart again. Look at the average.

The average monthly income of this person is just over $5,100. Some months, it’s not even half that, while other months reach nearly $9,000. Take the surplus in those high-paying months and set that money aside for future months.

Create your budget based on about $5,000. Imagine it’s March, and you made $8,700. You would assign $5,000 to categories in your March budget. When you’re done, you’d have $3,700 left.

Move over to April’s budget and assign those dollars to April’s expenses until you get to zero. Now you have a head start on April and only need to bring $1,300 to finish the month.

While the amount of money coming in is out of your control, you reclaim control by only budgeting the overall average.

Now, if you happen to get started on a low-income month, you’ll want to cut as much unnecessary spending as possible. Eventually, in a high-income month, you’ll get a chance to gain some ground.

Not all variable income hits quite the same. Whether you’re living in an unpredictable feast or famine, or if you know exactly when your income will drop, we have strategies to ride out the drought.

Scenario One: Unpredictable feast or famine

Freelancers, real estate brokers, and commission workers of the world: you know what it’s like to ride the highs and lows of irregular income. Your key: budget ahead.

Here’s how to do it:

1. Make a list of your expenses and non-monthly bills.
2. Tally up the total to find your average monthly living cost.
3. Whenever you get a “big” check, set some of that money aside for the next month or next few months based on the number you found above.

Meet Beth the freelancer

Beth is a designer and has a roster of freelance clients always eagerly vying for her time. When the getting is good, it’s good! After a few big projects, she could rake in some significant checks in a single month. But in the dry season (and there’s no telling when the dry season starts), it can get a little stressful not knowing when she’ll be paid again.

1. Beth makes a list of her expenses and non-monthly bills.

To figure out how much she needs to live each month, Beth makes a list of her expenses. She organizes them into different groups:

Monthly Expenses

• Rent: $1,200 (utilities included)
• Electric Bill: $80
• Spotify Subscription: $10
• Internet: $60
• Netflix Subscription: $9
• Phone Bill: $70
• Student Loan: $350
• Auto Loan: $200
• Crossfit Gym: $110
• Groceries: $350
• Gas: $100
• Visa: $25/month minimum (Carrying a $2,400 balance with 0% APR until October 2024)

Non-Monthly Expenses

• Car Insurance: $90/month ($540 paid every 6 months)
• Renter’s Insurance: $20/month ($240 paid annually)
• Amazon Prime: $10/month ($120 paid annually)
• Clothes: $100
• Gifts: $50
• Miscellaneous: $75

Quality of Life and Just for Fun

• Vacation: $100/month
• Date Nights: $100/month
• Dining Out: $275/month

2. Beth finds how much she needs to live each month.

When she adds it all up, Beth can see she needs $3,384 a month to fund her expenses. In the YNAB app, that total shows up in “Underfunded.”

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3. Beth funds the next two months of her living costs when two big invoices are paid.

When two clients pay Beth a total of $7,000, she is able to quickly fund two months and still have a little money left over.

Beth kicks back and takes a nice deep breath knowing she’s covered for the next two months. But not for long, because she’s got three more clients banging down her door (or flooding her inbox, more like).

Scenario Two: Predictable lean months

This is for seasonal workers, school teachers, and farmers. Your key: save for periods of no income, because you know when they’re coming and when they end!
Here’s how to do it:

1. Make a list of your bare-bones expenses and non-monthly bills based on your leaner months.
2. Tally your expenses to find the minimum monthly amount needed to get through a leaner month.
3. Get ahead during the fatter months by setting money aside, or pick up side jobs if you’re in the lean times.

Meet Seth the science teacher

Seth teaches middle schoolers all about science, and his whiteboard is often filled with dinosaur cartoons explaining the laws of thermodynamics or his favorite element in the Periodic Table. But when school finally lets out for the summer, he lets loose for approximately one week before picking up his nail-biting habit and thinking about how to make ends meet between now and the end of August.

1. Seth makes a mean-and-lean list of his summer expenses.

Seth splits his summer expenses into wants and needs.

Needs

• Mortgage: $800
• Car Insurance: $100
• Utilities: $75
• Phone: $70
• Internet: $45
• Groceries: $400
• Gas: $100
• Credit Card Payment: $25

Wants

• Spotify: $12
• Netflix: $9
• Amazon Prime: $10/month ($120 paid annually)
• Gifts: $30
• Dining Out: $50
• Fun Money: $50
• Clothing: $0
• Entertainment: $0
• Fitness: $0
• Stuff I Forgot to Budget For: $100

2. Seth adds up his summer expenses to determine how much extra he needs to make it work through August.

He adds up the total to see he’ll need $1,876 each month ($5,628 total for the summer). He has $4,134 in cash on hand, so he will need $1,500 to make up the difference, or $500 a month.

3. Seth picks up work to fund this shortfall.

Once Seth sees a specific number in front of him–his summer shortfall—it becomes easy to spring into action. He picks up shifts delivering groceries (+$600/month) which immediately covers a full month of shortfall. He also realizes his homemade fishing lures could be sold online and sales start picking up steam (+$200/month). At this point, he can choose to pick up fewer grocery shifts or just soak in the extra cash cushion until another round of middle schoolers tromp into his classroom. “It feels pretty good,” he thinks as he sips a cold lemonade by the pool, and summer just became a lot more restful.

Now it’s your turn. You have a variable income.

Stalling, avoiding, ignoring, or dragging your feet just means more time feeling out of control and stressed.

So, it’s time to get pumped up. You can gain total control of your money right now, and all you have to do is follow these four steps:

Step One: Give Every Dollar A Job

Be purposeful about the money you already have by assigning it to important jobs and resisting the impulse to forecast. Start with immediate obligations and go from there.

Step Two: Embrace Your True Expenses

Regular expenses make up just a portion of your plans. Set aside money each month for all of your True Expenses, especially when you have a great income month.

Step Three: Roll With the Punches

Change your budget. Life, like your income, is unpredictable. Your values may not change, but your priorities do—whether you like it or not. Change your budget, and you’ll stay in the game.

Step Four: Age Your Money

Actively set money aside for next month’s expenses and, if your income is highly variable, maybe the next month, too. Build yourself a cushion of money and time. You’ll sleep better at night.

(Sometimes we call these steps “Rules,” but either way, the cycle is the same. And it works.)

Rinse and Repeat

You can repeat this cycle whenever you get paid. Just because the rest of the world is confined to predictable weeks and months doesn’t mean you have to be.

Do you earn money that comes in a big windfall every couple of months? Super. Do you wait tables and get paid every day? Can-do. Something in between? It doesn’t matter. Keep following the steps, keep budgeting, and you’ll reach your financial goals.

You’ll enjoy saying “I told you so” to your mother-in-law, who wanted you to give up your dream for a day job.

Ready to take control of your irregular income and reduce the stress in your life? We’ve got the resources to help you make it happen!

• How to Manage Money with Irregular Income
• How to Manage Money if You Don’t Know When You’ll Be Paid
• The Dangers of Forecasting Your Money
• How to Make the Unknown Less Stressful
• How to Manage Money with Variable Income
• Small Business Budget: See a Real Example
• How to Set Up YNAB to Manage Your Business Finances
• Beginning Balance: A Podcast for Small Business Owners
• Budgeting with a Variable Income in YNAB