How to Budget with Inconsistent Income

The Story

The COVID-19 pandemic has hit the job market like a ton of bricks. Between layoffs, furloughs, pay cuts, and fewer hourly opportunities, lots of people are learning how to make it work with less. Which can be even harder to manage when that ‘less’ fluctuates from month to month.

Send help.

Got you. Start by pulling out recent paystubs (or looking at your checking account) to find the lowest amount you’ve made in the last few months. If you’re new to the inconsistent-income thing, estimate what your leanest month might look like. Now you have your baseline – aka the minimum you might have to cover your costs.

It’s not pretty.

Hopefully you’ll earn more some months, and shooting low gives you a buffer. Now, budget like you normally would. Some popular styles to get you going:

• 50/20/30 rule. This one’s all about organizing your spending by needs (50% of your income), goals like saving and investing (20%), and nonessentials (30%). If your breakdown looks different, that’s ok – these are guidelines. Try cutting some costs or ‘borrowing’ from the wants category, which is the most flexible.

• The envelope method. Aka setting spending limits for every budget category you can pay for in cash. Think: groceries, prescriptions, takeout, etc. Label an envelope, add cash, then stop spending when you run out. PS: if this method feels sooo 2019, you can try the digital version with sub-accounts at your bank.

• “Pay yourself first.” That’s when you send money straight to your needs (through automatic bill payments) and goals (with transfers to your savings and investment accounts). Then spend the rest on whatever you want. Best for people who know there’s enough in their bank account each month for less oversight.

Related: How to Adjust Your Budget If You Lose Your Job

Is that it?

If taxes aren’t automatically taken out of your checks, you’ll want to account for that, too. Experts suggest putting aside 25-30% of freelance or side hustle earnings for Uncle Sam. (Psst...unemployment checks are considered taxable income. Stimulus checks aren’t.)

Ouch, okay. Anything else?

When your pay is inconsistent, you’ll ideally want a little extra cushion on top of an emergency fund. This is for those months when your income doesn’t quite cut it or arrives in your bank account late. When you have a good month, save some of the extra for later.

Related: theSkimm on How to Save More Money, Faster

theSkimm

Unpredictable earnings can make your financial life more complicated. But it’s not a get-out-of-budgeting-free card. It makes planning even more important – so you’re covered when things are good and when they’re tight.