For those of us who earn a regular pay check, it is relatively straightforward to compose a monthly budget, showing how much we spend and earn - the difference is what can be set aside and invested. However, a large proportion of the population run a business, work shifts or work on commission. Their income varies month-to-month, which makes it difficult to smooth both spending and saving.
If you have an irregular income, budgeting can seem like a daunting task. It can be hard to plan for expenses when your income is constantly changing. However, it is important to budget your money regardless of how much or how little you make. In this blog post, we will discuss some tips on how to budget and invest on an irregular income.
Why budgeting is difficult on an irregular income
- Unpredictable: it's simply difficult to know when to be able to make large purchases or when you might have earned a holiday for example, without knowing what's going to come in next month.
- Can't base spending on income: many methods of budgeting advocate spending a certain percentage of your income and saving the rest (see the 50/30/20 method - 50% necessary costs, 30% discretionary costs and 20% savings). This is obviously very difficult to calculate when you don't have a base income figure.
- Have to survive periods of lower income: the waxing and waning of your salary means that you will have set aside money from good periods to cover the deficits in the bad ones.
If you have an irregular income, budgeting can seem like a daunting task. It can be hard to plan for expenses when your income is constantly changing. However, it is important to budget your money regardless of how much or how little you make. budgeting allows you to track your spending, see where you can save money, and make adjustments to ensure that your budget is balanced.
How to budget your money on an irregular income
So, we've established the 3 main problems faced by those earning irregular income. Now let's dig into the solutions:
- Expense Tracking: the first thing to do is work out how much you're spending. This gives you a baseline as to how much you roughly need per month on average to maintain your lifestyle
- Expense Reduction: secondly, you will want to optimise this by reducing unnecessary or duplicated spending and work out what your unavoidable expenses are. How much money do you need to survive?
- Worst-Case Income: you can now work out what a "bad" month looks like income-wise, so that you know whether or not you're able to get through one without dipping into your pot.
- Final Evaluation: now you know what your current spending, unavoidable expenses and worst case income are, you have a better idea of what your options are. If your worst case income covers your current spending, you're good for now. If your worst case income doesn't cover your current expenses but does cover your unavoidable expenses, you just need to re-evaluate your discretionary spending. And finally if your worst case income doesn't cover either, you're at a risk and will have to think about setting aside savings for deficits. 3 months of covering worst case income would be a good start for this.
Our savings guide is a good place to start for this evaluation.
Tips for investing on an irregular income
There will come a point at which it won't matter how much your earnings fluctuate because you have plenty to cover them and can survive for a sustained period with no income at all. However, this will take a little while. As soon as you have enough to be comfortable with 3 months of worst case income, you should start investing the excess. It is a good idea to work out a basic asset allocation based on your risk preferences - read more on that here.
After that you'll have some idea which buckets need filling up first. Many swear by pound cost averaging, which involves investing the same amount every single month, thereby buying more of an asset when it's cheaper and less when it's more expensive. However, the most important thing is that you get your money working for you consistently over the long term, and irregular monthly investments are perfectly ok. As long as you are investing proportionally more on higher income months, you will be able to look back on your investment amounts much as you did with your expenses and work out a baseline. This will allow for more complicated forecasting and predictions in the future. At Strabo, we've built a number of tools to help you figure out what these numbers are and what they mean on the Strabo dashboard. Sign up below to start using the platform today and delve deeper into your situation.