How to budget for irregular income

Understanding irregular income

Irregular income is where your earnings fluctuate. This could mean you have a different income one month to the next, or even week to week.

The opposite is regular income, where the amount doesn’t change. People who have a fixed salary from their job receive a regular income.

Common sources of irregular income

Freelancers, contractors, gig economy workers and seasonal employees may have irregular income. Many working on zero-hours contracts have irregular income. Business owners and commission-based workers are another example.

According to official figures, about 4.25 million people are self-employed. The majority will have different amounts of money coming in each month.

Having an irregular income may give you more freedom to work in a way that suits you. But the flipside is that managing your money can be tricky.

Challenges of irregular income

There are many challenges to having an irregular income. When you have a good month with higher earnings, it will feel great. But in the lean times, it may feel more difficult. The trick is to put aside some money in the good weeks or months to cover the lean times. But that’s easier said than done.

Some people with an irregular income will know when the high- and low-earning times might be. That might make it easier to plan when to save. But depending on your work, you may not know how much you’ll get paid in future weeks or months. This makes planning and budgeting harder. You may be more likely to lose track of income and spending and rack up unplanned debt.

Income fluctuation and financial planning

Income fluctuation can make financial planning difficult. Without a budget, it’ll be harder to save money, pay off debt and plan for the future. You may be unsure about how much money you can put away each month, or in the good months, to achieve your financial goals.

Steps to effective budgeting with irregular income

Many budgeting techniques assume you have a steady income. So, you’ll need to adjust these for your varied earnings, or use different tips to budget effectively.

Track all income and expenses

If your income changes each month, it’s important to track all your earnings and outgoings. Keep a detailed record of your sources of income and monthly expenses. Use a spreadsheet or app to help you. Look for patterns in your income to identify high and low earning periods.

Bear in mind your income might:

• Be cyclical – perhaps you earn more during the summer than the winter
• Have gaps at certain times of the year – perhaps you don’t work during school holidays or Christmas is always quiet

In these cases you’ll need to work out monthly averages to help you budget. You will also need to know how much money you need to have saved up ahead of the non-earning periods.

Categorise expenses (essential vs non-essential)

Now it’s time to categorise your expenses. Separate them into essential vs non-essential expenses. Essential expenses include:

• Rent or mortgage
• Utilities (water, gas, electricity, mobile phone, internet, TV licence, Council Tax)
• Groceries (food and toiletries)
• Travel to work
• Insurance (such as car and home insurance)
• Debt repayments

Non-essential expenses include:

• Clothing
• Haircuts and beauty treatments
• Socialising (such as cinema and restaurants)
• Takeaway meals and coffees

Establish a minimum monthly budget

If your income varies, set up a minimum monthly budget. Look at your expense categorisation and add the essential bills to the budget. Your lowest monthly income should be able to cover this. If not, you’ll need to look at where you can cut back.

It can be tempting to create a budget based on a good month’s income. But if you have a bad month, you may not have enough to cover your essentials.

By creating a minimum monthly budget, if you have a good month, you could treat yourself to non-essential expenses, or put extra into savings.

Here’s an example of how a monthly budget of £2,000 could work over three months of irregular income:

Don’t forget:

• If you know you have periods with no income, your essential expenses must include an amount to save up enough for the non-earning periods
• If you pay some bills annually (or quarterly), not monthly, you need to include a monthly amount to save up so you can pay the bill in the month it falls due

Build a financial buffer

It’s important for everyone to try and have a financial buffer in case things go wrong. This is even more important when you have an irregular income. An emergency fund can cover unexpected costs, such as fixing your car or boiler.

It can also get you through times when your income might be lower. Your income could suddenly drop dramatically, or you may need to stop work through your own illness or an accident, or to care for a sick relative.

Prioritise building an emergency fund to cover at least three months of essential expenses. Make it six months if you can. This should be in an easy-access savings account. Don’t forget to regularly check the savings rate so you’re earning a competitive interest rate.

Use zero-based or envelope budgeting techniques

Different budgets work for different people. You may like to try a few to see which works for you and your variable income.

With zero-based budgeting, you allocate every pound of your income towards a different purpose, such as paying the rent, food or saving. If you overspend in one area, you must reduce your spending elsewhere. At the end of the month, you’ll have zero left over. You start the next month form zero again.

There’s also the envelope system, known as envelope budgeting or cash stuffing. This involves having an envelope for each spending category, such as food and entertainment. The envelopes can either be physical or digital.

You put money into each one and can only spend what’s in each envelope each month. This could be useful if you need to be strict with your spending.

Advanced financial planning tips

In terms of wider financial planning, you may be able to smooth out your irregular income. This will help you plan and budget better for now, and for the future. You could also do some cash flow forecasting, to estimate your future earnings and expenses. This is just an estimate though, so don’t rely on it too heavily.

Make sure you also take note of tax considerations, and what happens if you receive Universal Credit.

Income smoothing strategies

You could try and even out your income so it isn’t so lumpy. You could do this by:

1. Diversifying your income streams. If possible, have different types of work or income sources. This could help you even out your earnings and reduce the risk of relying on just one source of income.
2. Taking on extra work. Consider side gigs or freelance work to supplement your main income.
3. Speaking to your employers. Maybe they could give you more regular work or tell you your shifts further in advance. This can help you spot gaps and take on other work if needed.
4. Saving the excess. When you have a really good month in terms of pay, save the excess. This can help smooth your income in the bad months. If you receive a surprise windfall, such as a tax refund or money from selling items on Vinted, also add it to your savings account.
5. Use two bank accounts. You might call these income and expenditure or business and personal. Have all your income paid into one and pay yourself a monthly ‘salary’ into your personal account.

Budgeting on Universal Credit

Fluctuating earnings can affect your Universal Credit. The amount of Universal Credit you get is based on your earnings for the calendar month before you actually receive your earnings. If you work a lot more hours than usual, you might get more Universal Credit than you’re entitled to.

If this happens, your Universal Credit payments could stop and you might have to reapply for it. There’s more information about this on gov.uk.

Tax considerations for irregular income earners

If you’re self-employed, you’ll need to sort out your taxes yourself. Set aside money for income tax and make sure you file your tax return by 31 January. A good rule of thumb is to put aside 25% to 30% of your income to cover your tax bill.

Check if any of your work is PAYE. This is where the employer deducts income tax before paying you. If your income is irregular, there’s a risk the tax could be incorrect. Check that your employer has the right tax code for you. You can also check this in your Personal Tax Account.

Managing debt and investments

If you have debt, it’s crucial you plan to pay it off. If you’re in the fortunate situation of having surplus income, think about whether you want to save or invest it.

Debt management advice

Having an irregular income, plus debts hanging over you, can make financial planning tough. Make things easier for yourself by creating a plan to clear those debts. The first step is to add debts to your budget and pay them off each month.

If you have credit cards, read our advice on clearing credit card debts. There is also lots of debt management help on MoneyHelper and Citizens Advice.

Investing strategies

If you’re debt-free and have an emergency fund in a savings account, you could consider investing leftover money. Investing can be a great way to grow your money. Diversify your investments – don’t just buy shares in Apple, for example – and carefully check any fees.

Investing is riskier than leaving your money in a bank account. But it could also grow your money faster over the long term. Experts suggest investing for at least five years. If you think you’ll need your money before that, it might be better to stick to savings accounts.

Tools and resources for budgeting

There are plenty of budgeting apps that can simplify the process, making it quicker and easier. You might want to download a few to see which you prefer. Some are free, but some have a fee – so check before you sign up.

Recommended budgeting apps

Check out our Best budgeting apps article for our review of four popular apps – Snoop, Moneyhub, Hyperjar and Emma. Your bank or building society may offer free budgeting help such as an online budget calculator or the option to save small amounts of money when you log into your online banking.

Moneyhelper also has a useful budget planner.

Financial planning workshops

If you’re serious about improving your money management, you might be able to find a free workshop.

Some employers offer financial planning workshops (check with HR). Banks sometimes offer them too. Keep your eye on social media in case you see any advertised. These are typically online but could be in-person too.

Financial planning firms may advertise free ones. Although, be aware that they’re probably trying to sign you up as a client. Always check the fees and small print and think about whether you need to pay for financial advice.

Conclusion: Achieving financial stability on an irregular income

It is possible to manage your finances effectively despite income fluctuations. It just takes a little bit of work. This includes setting up a budget, creating a financial cushion, plus some tax planning for freelancers.

Remember to check and adjust your budget if needed. And put money aside during high-income periods. This will help you achieve financial stability and plan for the future.