One of the most difficult aspects of budgeting is when you have to budget with an irregular income.
Try a Budget Planner
Excel or Google Sheets isn’t necessary to follow this principle, (neither is the very sleek YNAB app). It might make it slightly easier to get the job done, but it can be done on pencil and paper just as well.
To make your own budget planner, (excel, pencil and paper, whatever it takes) you’ll need to know how much money you make. Is that pretty easy for you? Some people are paid on salary and they know exactly how much they will make, so this isn’t a problem. Other people are paid hourly. My hours used to fluctuate based on how much I could work between school and family, so I really didn’t know exactly how much I’d bring home each month. Perhaps you work on a purely commission basis – sometimes you bring home a lot of bacon, and sometimes not so much.
So how do you deal with the variability of your income?
Solution #1: Order Spending by Priority
I’ve seen plenty of finacial advisors suggest a ‘priority approach’ to your budgeting. Basically what that means is this: At the creation of your budget planner, you would list all of your spending categories in order of importance. The most important five categories might be as follows:
I’m kidding about #4.
As you move through every category you’ll get a feel for what’s a need and what’s a want. Be honest with yourself. Basically when you’re paid, you make sure you take care of these top categories first. You prioritize and you stick to it.
If you’re paid $1500 every two weeks at a minimum (because your commissions fluctuate) you would want to make sure that you set aside some of your mortgage payment money from the second paycheck so you wouldn’t be left high and dry without any money for your other necessities. You want to even out your cash flow and stick to these priority categories. Your entertainment/vacation categories would come at the end of your list – but if you made a good amount of money one month then you could put a good amount towards your vacation (to be paid for later in cash).
Now keep in mind these priorities. Where people get into problems is they confuse this order. They end up buying a few wants before they’ve really taken care of #1 or #2 up there. All of a sudden your purchasing groceries on a credit card (and not just for the reward points).
If you take a hard look at the Expenses in the YNAB system, I made the default categories in a certain order on purpose: by order of priority. It helps each month to sit down and decide how much you’ll be giving before you decide how much you should spend on vacation. Also, when you allocate how much you’ll pay yourself (in the form of savings) you’ll be surprised there’s plenty left over when you get to the ‘miscellaneous’ category. The order of these categories has really helped me and my wife prioritize where our money goes.
I much prefer Solution #2. I steal a bit from Solution #1 (the priority budgeting I just mentioned) and use a method I’m yet to see anywhere else.
Solution #2: Delay Spending Your Money
This is where I enjoy the advantages of software (and of course, YNAB is my favorite). Budget planners can have this method built in, to somewhat automate the process, or you can just track it yourself. Software like Excel, sheets, or YNAB just makes it easier. And obviously a stand-alone application does as well.
Instead of having to worry about the variability issue of your income, why not just delay spending it?
If you have a great month as a salesman in January, and are paid in February for your January commissions, you’d end up spending that money starting March 1st. Let’s say you make $6,000 of commissions that are paid to you in February. You would simply let that money sit in your checking account. Then, come end of February or beginning of March, you sit down and ask yourself:
“How much did I make the previous month?” This is an easy question.
You made $6,000. You would then budget that $6,000 to be spent in March. What you made in March, you would then spend in April and so on.
So, if you’re really thinking this through, you might be wondering how the heck you could live through February if you didn’t spend any of the money you were paid during that month? That’s where your one-month buffer comes into play.
I insist that you save some money. This method is the ticket to no longer living paycheck to paycheck. But you have to live a little different for a little while – just a little while! It’ll probably take you a few months of hard work – living well below your means – to save up one month’s expenses takes a bit of fortitude, some desire, effort, persistence, sweat, dedication, and maybe a dash of faith.
Once you have that one month buffer you’ll be ready to use this method. If your expenses fluctuate with your income (you spend every penny you make? Shame on you!) then you’ll want to save an average of one month’s expenses.
On a personal note, my wife and I have used this method since we first married. We had some savings between the both of us and decided we would solve the problem of variable income (we were both working hourly at the time) by delaying spending our money for one month. Little did I know how powerful this principle was when we first started. It is really the foundation of our own Excel Budget Planner that we sell here on this site.
When you couple delaying your spending by one month along with prioritizing where your money goes first, as discussed above, you will find there is enough money coming in! 99% of people make enough money – they just don’t manage it!
I encourage you to give this system a try. I don’t mean necessarily that you purchase my system, I simply mean that you should give this principle a try. Save one month’s expenses. Prioritize your spending. Live on less than you earn. Have a good night’s sleep.
Want to skip the heavy lifting with your Excel budget? Try YNAB – it started as a humble spreadsheet in 2003, then we just kept making it better (just imagine what your budget would look like if you had a full team of software geeks and designers making it beautiful 40 hours a week). Give YNAB a try with a free 34 day trial.