If you’re one of the millions of Americans who are self-employed — or if you have a side gig or work on commission — the idea of creating a monthly personal budget may seem daunting. The main reason: Most budgeting systems and expert advice tell you to start your budget by pinpointing your “regular monthly income.” But how do you do that when your income fluctuates wildly from month to month?
The answer is to set up an “irregular income budget.” Fortunately, it’s not complicated to create. Here’s how:
1. Determine a Baseline Monthly Income
The safest bet is to base your budget on your lowest monthly income over the past year. Review your pay stubs, business accounting records and bank statements to find that magic number.
Important: If you’re self-employed, be sure to subtract your estimated business taxes from that amount before you use it as your budget baseline.
Unsure about how much to set aside for estimated taxes? Talk to a tax professional or the IRS.gov.
2. Identify Must-Pay Monthly Expenses
During months when your income is tight, you may need to pay your bills in order of importance. So start by identifying essential expenses and their dollar values. These include mortgage or rent, food, utilities, transportation, insurance, and minimum-required debt payments (as with credit card balances).
3. List All Other Monthly Expenses
Once you’ve got the basics covered, make a list of other expenses in order of importance. These are items you can pay during months when you earn more than your baseline income (step 1). They may include beyond-the-minimum debt payments, “nice-to-have” business supplies and fun expenses such as restaurant meals and weekend outings.
Here’s how it works: If you bring in more income than your baseline in a particular month, simply tick down your budget list. First, pay all your essential expenses. With whatever income you have left, put money toward other budget categories, using the priority list you created.
You may not be able to pay for every item on your “other expenses” list right away, and that’s OK. Your secret weapon is coming up next: your buffer account.
4. Set up a Buffer Account For Lower-Earning Months
During your higher-income months, consider adding some money to a bank savings account. This is your buffer account, and it can be the self-employed person’s best friend. A good long-term goal is to save three to six months’ worth of your baseline income. However, any amount of savings is better than none.
This account can provide you with extra money during months when you happen to earn less than your baseline. It’s also a safety net in case you run into unexpected expenses, such as auto repairs or medical bills.
And that’s all there is to it. Once you get into the habit of listing your expenses in order of importance, you can use the same list to create your personal budget every month — regardless of your income.