How to budget on an unpredictable income

People without a regular income, such as real estate agents, insurance brokers or fledgling entrepreneurs, have special challenges when it comes to creating a budget. However, it's not impossible.

"[Budgeting] is a hard thing to do for those who are self-employed," says Kyle Peters, a Delta, B.C.-based expert with the national Credit Counselling Society. "It's so up and down, it can be nothing one month or $10,000 another month."

But budgeting and financial planning are certainly within reach, says Brian Betz, a Calgary-based debt counsellor with Money Mentors. irregular-budgets

First step: calculate basic expenses, average pay
"You need to be more organized and more disciplined," Betz says. "The unpredictability [in income] means you have to have more foresight."

Gather all your credit card statements, debit account transactions
and any other receipts and bills that'll help you paint a picture of your expenses. Try to gather six months' worth of information. Then, lay
out all the costs: fixed costs, such as rent and loan repayments; regular fluctuating costs such as utility bills and groceries; and miscellaneous costs such as entertainment and hobbies. If possible, calculate the average you'll spend on holidays and other seasonal expenses, too.

Add up the totals in each category, and divide by six (or however
many months' worth of data you have). Your totals show the average cost of your basic needs each month.

Next, do the same with your income from those months. Your monthly budget should not exceed this number. If it does, it's time to scale back on hobbies or perhaps trim your holiday gift list. Alternatively, you can consider taking on a second job to increase your income.

If this is your first foray into unstable income, or perhaps your paycheques are too varied to get a clear idea of your average income, you'll need to create an incredibly slim budget, Betz says.

"Set out a minimal budget because you don't know what income you've got," Betz says. "After that, adjust on the fly after more information about your monthly pay is gathered."

Build savings
The biggest priority for those with irregular pay is to establish a secondary account for supplemental income during the dry months. Peters calls it a holdings account, and it should hold enough to carry you through three to six months of no income.

To create a holdings account, keep enough of each paycheque in your regular account to cover your basics. Then move any excess to the holdings account.

"It's meant to even out those peaks and valleys," Betz says. "This second account plays a key role along with an accurate spending plan that you've built."

Even if you get larger-than-average paycheques a few months in a row, don't be tempted to increase your basic budget. Continue to put the excess in the holdings account. You never know when you're going to have a few months of lower-than-average income, and you'll be glad for the extra savings when you do.

"We don't want to do anything too hasty in adjusting spending," Peters says.

Prepare to revisit and revise
You may want to write down your budget in pencil, because budgets are an "ongoing" document, according to Betz. That goes for people with regular or irregular income.

Tweak your budget to reflect your current situation. If you have a few sparse months, you'll need to allocate more toward savings and less toward entertainment. If your new business thrives, you may be able to allow more spending in your basic budget than you originally planned.

Even if you celebrate with a single splurge, you'll want to account for it. Think of all the costs of your splurge, not just the sticker price. If it's a vacation, for example, you need to save up for the trip and for any loss of income while you're away. Treating yourself by purchasing the vehicle of your dreams? Don't forget to calculate insurance, gas and other fees.

"Revisit your budget often, but be realistic in terms of your income and expectations," Betz  says. "Make sure everything evens out and every dollar coming in and going out is accounted for."

Watch for red flags
Having a budget won't do you much good if you aren't following it, so be sure to watch for warning signs that you aren't sticking to your plan

For instance, you shouldn't be living lavishly one month, then like a pauper the next. If your lifestyle fluctuates that drastically, it's a sign you aren't managing your income properly.

Another no-no is relying on your credit card or line of credit to bail you out during the slow months.

And if the month-to-month budgeting and re-examining of your budget has you confused, seek help immediately.

"This [non-stable income] lifestyle requires more planning ," says Peters. "If you have spending issues, you need to see a counsellor. Some people don't like the idea of putting things on a spreadsheet and organizing -- counsellors can help you do that."

Finally, make sure you separate business income from personal income. Some self-employed people don't even know what their annual salary is because they've married their business with their personal accounts.

"You should have a business budget, and a personal budget, then pay yourself so income is moving into your personal account," Peters says.

See related: 7 tips for staying out of debt when unemployed, What's first to go when downsizing budget?
Published November 3, 2015

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