Irregular Income Definition: Examples And How To Budget It

Irregular Income Definition:

Not everyone has a regular income, freelancers, contract workers, part-timers, and others may live on an irregular income, which most times causes stress, especially when calculating irregular income.

However, with the best budgeting method, you can avoid that stress and create a strong plan for managing your expenses even when your income fluctuates. 

In most cases, calculating your irregular income will help you stay on track without overspending and investing in the best ways you can. Therefore, this article will provide a guide on what irregular income definition is, its examples, and how to budget it.

What Is An Irregular Income

Unlike a traditional salary, Irregular income is an income that varies in amount from month to month or which is received at irregular intervals. This means that your monthly income is unpredictable and can fluctuate. 

Paying living expenses with an irregular income can be frustrating and overwhelming, so dealing with irregular income to pay living expenses requires great planning and management skills.

Also note that planning and living within your income is crucial, as this helps avoid excessive spending of money and going into debt. 

What Are The Examples Of Irregular Income?

Below are the examples of irregular income:

  • Stock purchases, stock options plans, or restricted stock units
  • Part-time work with irregular hours
  • Self-employment income
  • Monthly or annual bonuses
  • Commissions based income 
  • Lottery wins 
  • Interest on savings

What Is The Importance Of Planning And Budgeting Irregular Income?

Planning and Budgeting is a great way to create financial stability. By creating a detailed budget that accounts for your fixed, variable, and periodic expenses.  Also, you will gain better visibility into your financial situation. This will keep you from overspending, and help shut down the risk of debts.

Here are a few reasons why you should plan and budget your irregular income, regardless of your financial circumstances:

1. Provides An Easy And Effective Way Of Managing And Avoiding Debt

One of the reasons thousands of people find themselves weighed down with hefty interest payments is that they simply spend more each month than they bring in and as a result, they become unable to pay off their card balances. 

To avoid this problem, start budgeting your money and make sure your weekly and monthly spending does not exceed your income.

2. Can Prepare You For Rainy Days

Creating a budget is the first step towards saving and preparing for rainy days. By tracking your income and expenses, you can identify areas where you can cut back and save more.

3. It Helps You Avoid Overspending

One of the advantages of planning and budgeting is that it prevents you from overspending. When you plan and record your expenses, you gain a clear and up-to-date record of your spending, making it easier to stay within your budget.

Steps On How To Plan And Budget An Irregular Income

The following are step-by-step guides on how to help you plan your income and save you from a year of financial stress:

Step 1: Calculate Your Income (What Is Your Average Monthly Income)

When calculating your income, you should estimate it based on your average monthly income. Planning with your average monthly income rather than annual income can give you a sense of safety. 

To calculate your monthly income, you can add up the amount you made over the past 6 or 12 months to get an accurate monthly figure. For example, let’s say you make $52,000 over the past 12 months. Then, divide that sum by 12, and you will get an average monthly income of $4,333.

In reality, you probably made more some months and fewer other months. 

Step 2: Calculate Your Monthly Income After Tax

It is recommended to calculate your monthly income after tax. Hence, to calculate tax on irregular income use last year’s tax records to help you estimate the amount of income to expect. 

For example, if you live in New York and earn a total of $52,000 annually, you will be taxed $11,162, which means your total income will be $40,838 after tax. 

Example:

  • Salary: $52,000
  • Federal income tax: -$4,492
  • State income tax: -$2,396 
  • Social Security: -$3,224
  • Medicare: -$754
  • SDI (State Disability insurance): -$31.20
  • FLI (Family Leave Insurance): -$266 
  • Total Tax: -$11,162
  • Salary after tax: $40,838.

Step 3: Create a Spending Plan Based On Paying Necessary Living Expenses 

A spending plan is simply a plan you create to help you spend money the way you want to spend it. The spending plan should include household expenses and regular monthly payments such as rent and bills. 

A spending plan should also include irregular payments such as medical pay, car payments, and savings. Think of your expenses in three types: fixed, variable, and periodic.

1. Fixed expenses include: 

The fixed expenses are costs that remain the same in price and frequency. They are bills you have each month, such as

  • Rent or mortgage payments
  • Cell phone service
  • Utilities (gas, water, electricity, trash)
  • Groceries
  • Health 
  • Kids’ daycare, and school tuition 
  • Pet expenses (if you have any)
  • Student loan or car loan payments

2. Variable Expenses:

Unlike fixed expenses, variable expenses are costs that change over time. Hence, budgeting for variable expenses can be challenging, as you may not be able to figure out exactly how much they will add up from one month to another. 

What is included in variable expenses will vary from one person to another, but some of the most common variable expenses you may pay include: 

  • Clothing
  • Gas
  • Healthcare expenses
  • Entertainment (concerts, sporting events, movies, and others)
  • Home maintenance and repairs
  • Travel

3. Periodic Expenses

Periodic Expenses are irregular yet predictable expenses. Unlike fixed and variable expenses, they don’t occur every month.

For example:

  • Holiday gift giving
  • Major car repair 
  • Birthdays
  • School supplies 
  • Vehicle and home maintenance
  • Property taxes
  • Pet vaccinations

These are the items that you spend money on occasionally. Evaluate the monthly cost of each item to determine how much you will spend in a month or year. Evaluate the importance of spending on these items and look for less expensive alternatives.

Step 4 : Pinpoint Other Monthly Expenses

These expenses may include a few bills you couldn’t pay during tough months when you earned a lower income.

 This list may also include things you’d like to pay for during higher-earning months:

  • Extra Debt Payments: This may include more than the required minimum on your credit cards or extra on a car loan to get it paid off sooner.
  • Transportation: This cost includes what you spend on daily travel and commuting. 

For those who own a car, monthly car payments and vehicle insurance are transportation costs to factor in.

  • Savings Contributions: Savings should always be part of your budget, such as creating a savings account, and saving for your kid’s school expenses or investing for retirement.

Step 5: Subtract Your Expenses From Your Income

The typical method for budgeting is to subtract your expenses from your income and then save whatever you can from the remaining.

You can do this by calculating the average payment you make a month and calculating the expenses you need to pay for every month. (such as rent, groceries, and internet), once you figure out the total amount of money you spend on expenses each month, subtract it from your monthly income.

Step 6 : Track Your Spending

Once you have an accurate idea of how much you need to spend on general expenses each month, you’ll need to monitor your spending going forward. 

This will help you avoid spending money on unnecessary things, and also avoid going broke. Sometimes, you may find that your estimates were correct, but you might also encounter expenses that you had not considered before. 

Thus, you need to record where your money goes. So, start by creating a list of what you need each week/month. This will help you create a better budget and manage your income.

The key advantage of tracking your spending is that it acts as a financial compass, preventing you from overspending. When you record every expense, you gain a clear and up-to-date record of your spending, making it easier to stay within your budget.

Step 7: Consider Building An Emergency Fund

Living on an irregular income can be quite overwhelming because you never know what will happen the next day. However, you can gain peace of mind and reduce your stress by creating an emergency fund that can be of help in any situation. 

This is an amount of money that you keep separate from your other funds. The purpose of an emergency fund is to have money that you never touch unless it is needed. The amount you keep in your emergency fund will depend on your situation

However, people living on irregular incomes often keep one year’s worth of expenses. So, if you are not sure about the amount to keep in your emergency fund, think about the amount of money that will be comfortable for you to save without taking it out the next day.

Step 8: Automating Savings

When it comes to saving a save-it-and-forget-it approach is usually the best. You can do this by opening a separate savings account and setting up a recurring transfer from checking to savings on the same day each month.

Since you have already calculated your average monthly income after taxes and your expenses, you can determine how much you can afford to save each month without going broke 

Note: this is different from an emergency fund, putting your money into savings can help you start a business of your own shortly, savings account allows your money to work for you by earning interest over time.

Step 9: Practice Smart Spending

Practicing a smart approach to spending can make all the difference when dealing with irregular income. You can do this by following the steps below:

  • Cut back during low-income months

When you are earning irregular income, it is important to acknowledge that not every month will bring high earnings.

Embrace smart spending during low-income periods by identifying areas where you can cut back. This strategy can make a significant impact in helping you manage your income.

  • Discern Needs from Wants

It is important to discern your needs from your wants, focus on fulfilling crucial needs first, ensuring that essential expenses like rent, groceries, and utilities come first over things like seeing a movie. 

This mindset will help you gain a disciplined approach to spending.

Step 10: Review Your Budget Regularly

Once your budget is set and done, it’s crucial to review it regularly so that your spending on a regular basis won’t surpass what you’ve budgeted. 

You may earn more, your expenses may change or you may reach a goal and want to plan for a new one or make adjustments. Whatever the reason, get into the habit of regularly reviewing your budget.

Conclusion

Remember, planning and budgeting irregular income comes with strong discipline and adaptability. 

By implementing the methods above and staying proactive, you can effectively budget and manage your finances and achieve financial stability. Therefore, This article has provided a guide on irregular income and how to plan and budget it. 

Reference 

  • Linkedin.com
  • Nerdwallet.com
  • Familybudgetexpert.com
  • Ramseysolutions.com
  • Talent.com
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