How to budget on an irregular income

Whether you’re considered a temporary, contract, fixed-term, or casual employee or are self-employed, alternative work arrangements can give you the freedom to set your own schedule and pursue a career you love. They can also cause financial stress when your income is inconsistent or unpredictable. Budgeting is different when you have an irregular income. Whether you’re a freelancer, business owner, seasonal worker, or part of the gig economy, this guide can help you create a stable monthly budget.

Calculate your income

Most budgets start with your monthly take home pay, but with flexible employment, your income can vary from month to month. To get your budget started, review your last few years of financial statements or the net pay on your notice of assessment to calculate your average yearly income. If you’re new to the industry or your work fluctuates widely from year to year, choose your lowest annual income. In a worst-case scenario, you’ll end the year with extra money left over rather than struggling to make ends meet.

Once you have your average annual net income, divide it by twelve to find your monthly income. Use this as your salary throughout the year to balance your income during peak and low periods.

Calculate your expenses

Now that you know how much you can spend, find out how much you do spend. Start by sorting expenses into essential vs. non-essential costs. Make sure you allocate enough to cover your fixed monthly expenses—expenses that cost the same from month to month—and necessities like your rent or mortgage, transportation, groceries, and utility bills. Once these are covered, you can budget for non-essential, quality-of-life purchases like nights out or fun activities.

Like your income, your expenses will fluctuate from month-to-month. During your busier or higher earning months, put more money aside for savings and non-essentials. This will make paying for things like seasonal expenses (e.g., winter heating, home improvements, car maintenance, holiday gifts) or achieving your financial goals, like an emergency fund, easier when you’re earning less.

Set up savings accounts

Separate bank accounts are a great tool to manage your money. If you work for yourself or seasonally, consider setting up more accounts than just your standard saving and chequing accounts with your financial institution. Here are three accounts you might want to consider:

1. Income account: Instead of your paycheque going directly into your savings or chequing account, set up an account specifically for any income you receive over the course of the year. You can then set up automatic payments into your everyday account at the above determined monthly amount to help you stay on budget.
2. Tax account: If income taxes aren’t taken off your paycheque or you’re self-employed, make sure to set money aside for tax time. That way, you won’t be surprised or left owing a large amount of taxes when income tax season comes around. The general rule is to set aside a minimum of 25-30% of income earned for taxes. You can set up an automatic payment from your “pay account” each month, so you won’t have to withdraw the money from your everyday savings or chequing account.
3. Emergency fund: When your income is irregular, it’s even more important to save money for both yourself and your business. If your income is reduced or you can’t work for some reason, you can use these funds to cover expenses instead of relying on credit. This money can also be used to replace broken tools or equipment you need for work.

Track your spending

Budgeting isn’t a one-and-done process. Your priorities and goals can change throughout the year, and your budget should change with them. Don’t be afraid to reevaluate and adjust your budget to reflect changes in your spending habits and lifestyle.

It’s also important to track your spending every month so you can learn your habits and find areas of improvement. There are lots of tools and apps to help you track spending so find the one that works for you.

Most people are surprised by how much they actually spend, but don’t be discouraged. If you go over budget, go back to the drawing board. Check if there are places you can cut back or set SMART goals to create better money habits.

Don’t forget to keep receipts for work related expenses like tools, travel, client meetings, or even your Wi-Fi and rent if you work from home. Depending on your job, you may be able to expense these to your employer or claim them on your taxes. Be sure to double check which expenses are tax deductible before filing.

Don't forget benefits

Working for yourself or doing contract or temporary work may limit your access to traditional benefits—but they shouldn’t be ignored. When setting up your budget, be sure to account for these additional costs:

• Taxes: Just because they aren’t taken off your paycheque doesn’t mean you won’t have to pay them. It’s easy for small business owners and temporary workers to fall into tax debt. Learn the consequences of missed income tax payments and how to avoid them.
• Employment Insurance: If you're self-employed, a small business owner, or gig worker you’re not required to pay EI premiums. While it may not cover unemployment for freelancers, EI still provides special benefits like caregiver, maternity and sick leave.
• Vacation: No matter how much you love your job, it’s important to take time off for yourself. Set aside a “vacation fund” not just to pay for travel, but to supplement your income while you’re away. Look into taking time off during slower periods so you don't have to worry about lost income.
• Healthcare: Most seasonal, freelance, or gig economy jobs don’t offer health insurance. Look into alternate plans like independent insurance or, if you have a partner, consider joining their insurance plan.
• Insurance: Depending on the tools and type of work you do, insurance may be a worthwhile investment. Life and liability insurance can protect your business and your family’s financial future. Depending on your province, these costs may even be tax deductible.

What if your budget doesn’t work?

The unexpected happens more than you think. It can be particularly difficult to cover emergency expenses if you don’t have a steady paycheque to fall back on. It can also be more difficult to borrow money from traditional lenders if you’re new to self-employment, as a history of employment or steady income is often required. If you need money in the short term, consider picking up an additional part-time job or borrowing from friends and family.

Sometimes, the problem isn't temporary. Between interest rates and minimum payments, debt can get out of control if your income isn’t predictable. In cases like this, it’s best to talk to a Licensed Insolvency Trustee. An LIT can review your finances and design a personalized debt solution to help you achieve a fresh financial start. Get started by booking your free consultation today.