Creating a Spending Plan with Inconsistent Income

In my last blog post, we talked about creating a spending plan that works but what if your income can be different from one month to the next?

Freelancers, entrepreneurs, and those in the gig economy often find themselves facing the rollercoaster ride of irregular paychecks. The key to financial stability in such situations lies in creating a well-thought-out spending plan that adapts to your varying income streams. 

Track Your Income Patterns

Before you can create your spending plan, you need to understand your income patterns. Look back a few months to track your earnings, noting the highs and lows. This will help you identify trends and periods of ups and downs. By having a clear picture of your financial landscape, you can prepare for lean months and take advantage of prosperous ones.

Calculate Your Average Income

With a history of your income patterns, calculate the average income you earn over a certain period (say, six months to a year). This average becomes your baseline for creating a spending plan that accommodates both the good times and the lean times.

Prioritize Essential Expenses

Don’t forget to pay it forward and pay yourself first like we discussed in our last post.  List your essential monthly expenses (your “rocks” and “gravel”), such as rent or mortgage, utilities, groceries, and insurance. These non-negotiables should be covered regardless of the state of your income.

Create a Flexible Spending Plan

Unlike a traditional plan, your spending plan with inconsistent income should be flexible. Allocate a certain percentage of your average income to each category, rather than fixed dollar amounts. This way, you can adjust your spending based on the income you actually receive in any given month. 

Build an Emergency Fund

Since your income is unpredictable, having an emergency fund is crucial. I generally lean towards 6 months worth of expenses for business owners. Set aside a portion of your earnings to build up this fund. It will provide a safety net during lean months and prevent you from going into debt. We will dive into how to build your emergency funds in our next post. 

Categorize Non-Essential Spending

Divide your discretionary spending into categories (your “sand” and “water”), such as entertainment, dining out, travel, and shopping. Allocate a percentage of your average income to each category. If your income exceeds expectations, you can indulge a bit more in these areas. During lean periods, you’ll know exactly where to cut back.

Monitor and Adjust Regularly

Your spending plan isn’t set in stone. Regularly monitor your actual income and spending against your plan. Adjust your allocations as needed, especially if your income patterns change. This proactive approach ensures that you’re always in control of your finances, adapting to the ever-changing landscape of your income.

Set Financial Goals

Even with inconsistent income, setting financial goals is crucial. Whether it’s paying off debt, saving for a big purchase, or investing for the future, having clear goals will keep you motivated and focused. Break these goals into smaller milestones that are achievable regardless of income fluctuations.

A great book to read for business owners is “Profit First” by Mike Michalowicz.  He walks through ways to set up your business that align with the concepts we talk about here.  

Crafting a spending plan with inconsistent income requires patience, diligence, and adaptability. By understanding your income patterns, creating a flexible budget, and building an emergency fund, you can achieve financial stability even in the face of irregular paychecks. Remember, the key is to be proactive, regularly assessing your financial situation and making necessary adjustments. With the right approach, you’ll be well on your way to mastering your finances and achieving your long-term financial goals.

Next week we will talk about how to build that emergency savings so don’t miss it!

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