Those who earn an irregular or unpredictable income should be at the head of the line of those adhering to a sound budget, not bringing up the rear as they so often do. Avoiding it will likely lead to squandering funds you could be socking away for retirement at a younger age, and thereby losing the power of compounding that you can never regain.
Many of the highest earning jobs today are in fields where the incomes are unpredictable because of commission plans, stock options, bonuses and other incentive-based pay structures. Add to that the list of freelancers, independent contractors and small business enterprises and the number of those with irregular and unpredictable incomes is long and growing.
The natural tendency is to scrape by when the times are lean – a high-anxiety choice – and spend extravagantly when you are flush. The sounder, more reassuring and more financially beneficial course in the long run is to take the time and discipline to make a budget.
“Uncertainty is an uncomfortable position. Certainty is an absurd one. “
– Voltaire
Voltaire said that back in the 1700s, but it could be written today, or for sure during our most recent economic meltdown in 2008. If you are one of those with irregular income, take solace in Voltaire’s quote, and also take solace in the fact that all those who think they have “regular” incomes face other types of uncertainties, too.
Embrace the unpredictable, but do it while adopting some form of these budgeting concepts to bring more stability and peace-of-mind to your life.
Determine your “essentials” budget – food, shelter, utilities, transportation, healthcare and income taxes (funny how this last one can get left out). This number is critical to the process. If you don’t know that number, you will never know where you stand.
Log your historical earnings – look at your earnings over a period of time. Determine when and why the ups and downs occurred. Are there patterns that might help you predict the ups and downs? Can you determine, or at least predict, some averages?
Establish your emergency fund – establish a liquid fund (money that you can access easily) to cover your essential expenses for three to six months. Yes, that is a broad spectrum and you need to determine where you fit on it. If you are in a field in which you can easily move to a new employer should you lose your job, the shorter end of the spectrum is fine. If not, go for the longer end of the spectrum.
Establish a Living Expenses Cushion – this is apart from the Emergency Fund. It covers the essential expenses, but is intended as a cushion against income ups and downs or loss of a job, rather than any other emergency. Once it is established, you can pay yourself a regular “salary” out of it to cover the essential expenses.
Add Your Own Benefits – Once you have survival and emergencies covered, it is time to handle your future retirement and the lifestyle options it can bring. The options are many, but it is important to find ways to make contributions sooner rather than later, as starting sooner always has advantages over the alternative.
Add the other expenses – This is the non-essential stuff. Add whatever you want, but it works great to prioritize starting with “really wants” and sliding down to the “nice, if and when we can afford it.”
Forbes has a nice article on how to budget for irregular incomes here. LearnVest has a real-life account of dealing with this issue for a family of three, here.
Numerous budgeting tools are available online. Among them:
- Dave Ramsey’s Irregular Income Budget Form, an old school budgeting form
- BudgetTracker, an online service to track income and spending
- BudgetPulse, which adds a savings tracker
- Billster is an online expense tracking service that adds the option of setting up group expenses.
So what if your income is irregular? Embrace it, but get a handle on it. Like death, taxes and the IRS, uncertainty is here to stay.
Knowing where you stand and then setting priorities is critical to a plan for your future. Our firm’s Lifestyle Driven Investing™ wealth management plans start with that and a thorough look at what our client’s want to do in the “second half” of life.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.
