How to run a household budget with irregular income?

How should commission-based salespeople, freelancers, and others who are never 100% sure of their income manage a household budget? Today, you will find out exactly how.

To start, I’ll tell you that these are methods proven in practice, not just theory. I have been managing a household budget based on irregular income for years. Neither my wife nor I have ever been employed under a standard employment contract. That is why I am fully convinced that this system simply works.

How do you define irregular income?

With variable earnings, you don't know what amount to enter into your budget. That is completely normal—you aren't a psychic, after all. However, there is a simple solution. You need your earnings history from the last year, or ideally, the last few years.

Even if you haven't kept a budget until now, that’s fine. Just look through the history of the bank account where you received your payments. List all the months and their corresponding amounts. Don't do this on paper; use Excel. You’ll find out why in a moment.

While you're at it, check if your salary is staying level, growing, and if so, at what rate. If you earned 45,000 PLN last year and 42,000 PLN two years ago, did that growth beat inflation? Your income grew year-over-year, but was the increase comparable to raises in previous years? This is a moment for reflection, which often gets lost in the daily grind of urgent tasks and KPIs. Now you can take a look at your work and decide if it's worth asking for a raise or perhaps looking for a new job.

Average annual income

I suggest the simplest method, which I have used myself: calculate all your net income from the previous year and divide the result by 12 months. This will give you the amount you have available each month. If your salary is similar every month without major fluctuations, this method is also for you. For safety, you can divide your annual income by a higher number, such as 15. This will give you a larger safety margin in case of a lean period.

In addition to setting your maximum spending limit, you also have a cheat sheet that shows you how much you should be earning monthly. If you stick to the average, everything is fine, and any better month will be additional income. However, do not spend these funds on extra consumption. Remember that we are setting these levels for your security. If you are earning more year-over-year, also check if the current growth in earnings aligns with your previous trends.

This method assumes that your earnings are fairly stable, which carries a certain margin of error, making it less secure than the second version presented below.

Minimum monthly income

The second and much safer way. Once again, look through the entire previous year and find the month in which you earned the least. From now on, this is your threshold amount for expenses. If your income fluctuates, for example, between 3,500 PLN and 6,000 PLN, you assume that you only earn 3,500 PLN every time.

You set aside any surplus to protect yourself against months with low earnings or no earnings at all, provided that is a possibility for you. If you consistently earn more than the minimum, you will quickly build a financial safety cushion.

What happens when temporary expenses exceed your earnings? Nothing bad. Don't panic; that is the premise. By following this rule, you are protected not only against this but also against lifestyle inflation, which you will read about in the next article.

How to manage a budget with irregular income

Once you have decided which of the above methods you intend to use, it is time to review your expenses. At first, focus only on the essentials: rent, bills, food, health, hygiene, and commuting. Your minimum income must cover your minimum cost of living. There are no exceptions to this.

If you have debts, such as a mortgage, an average income should easily cover them. With a minimum income, it might not be as easy, so set aside every surplus for this specific purpose, for example, using the sinking fund I wrote about previously.

Allocate everything you earn above that threshold to savings, entertainment, or whatever you choose. However, if you have nothing left over, or worse, if you're coming up short, it's time to take a closer look at your expenses. Irregular earnings are characterized by better and worse periods, which involves not only improving your standard of living but also being prepared to lower it when necessary. Maybe it's time to cut back on clubbing, new gadgets, or clothes, or perhaps it's time to roll up your sleeves and look for new sources of income?

The biggest problem with irregular earnings

I don't want you to just save constantly and worry about tomorrow. That way, you'll end up a frustrated miser with depression. I want you to enjoy life, because there is nothing wrong with rewarding yourself for your discipline. They say the longer you wait, the better the reward tastes. At least that's what the principle of delayed gratification says.

I just want you to do it wisely and stay safe. A sober assessment of the situation and a quick reaction can prevent a disaster. A reckless approach to finances and overestimating your earnings during better periods have already brought many people down to earth and forced them to tap out. Believe me, this applies to everyone—from corporate employees to business owners. That’s how lifestyle inflation works—but you can read about that in the next article.