It’s tough enough to budget money—by which I mean keeping your expenses from exceeding your family’s income—when you have regular paychecks. But if you’re self-employed like me, or if you work on commission, you know it can be even tougher. In most cases, your family’s set monthly costs don’t change all that much, but, on the other hand, your monthly income can go up and down like a rollercoaster. So how do you manage your family’s budget when your monthly income is inconsistent?
1. Build up a cushion. Aim to keep some money in either a separate savings account or just a separate category within your budget. Name it something like “Cushion” or “Buffer,” and put a little money into it every month, if you can. When you hit a lean month, it will be there for you to draw from. In fact, a cushion is such a good idea that Jesse Mecham, creator of the “You Need A Budget (YNAB)” budget program advises it for people who have regular jobs, too. He suggests slowly setting aside a month’s worth of expenses. (A smart goal is to eventually build an emergency fund that can cover at least six months of expenses.)
2. Pay yourself a set salary. I know several fellow entrepreneurs who treat their businesses like piggybanks. They make personal draws from their business accounts whenever they want or need to buy something. And if they have a good month and bring in lots of income, they splurge as if they’d just earned a bonus. I personally am more conservative. I draw the same salary every month from my business, no matter what. This gives me the illusion that I’m earning consistent income from a regular job. Plus, I rarely have months when I come up short.
The catch: My regular salary has to be low enough that I can draw that amount even during my low months. This means looking back a year, identifying my least profitable months, and building my salary based on those time periods. For me, that ended up being about half of what I gross during my leanest times.
3. Create an “essentials” list and an “eventually” list. In other words, prioritize your monthly spending. Financial expert Dave Ramsey suggests listing out your must-pay monthly expenses (mortgage, insurance, gas, groceries, and so on). Then, keep a separate running list of things for which you’d like to pay (such as a dinner out, an upgraded computer, or a new roof) that you can cover when you have extra money available. Obviously, you won’t be able to cover every “eventually” expense every month. In that regard, budgeting with an irregular income is very much like budgeting with set paychecks: You simply can’t have it all every month.
4. Build in bonuses. The best thing about drawing a modest salary from your business every month is that you may be able to give yourself occasional bonuses. A good time to do that is after you’ve paid your taxes each spring, so you know you have enough money set aside to cover key expenses. Bonuses are also a rewarding reminder of why your income is so up and down to begin with—because you chose a job that gives you more flexibility and control of your money.
Teri Cettina is a mom of two daughters and freelance writer who specializes in personal finance and parenting topics. She blogs at Your Family Money. Follow her on Twitter: @TeriCettina.