Creating Income Regularity with an Irregular Income
A common question I get from people with an irregular income is “How in the world can I budget when I don’t know how much I will make this month?” If you struggle with managing your irregular income, you’re not alone.
As a financial coach, I have clients who are real estate agents, therapists, musicians, freelance designers, authors, sales reps, etc. One thing they all struggle with is how to balance the really good months with the really bad months. Here is what their irregular monthly income could look like:
January: $1,500
February: $10,000
March: $3,250
April: $16,000
May: $0.18 (kidding, but you get the idea)
The approach I noticed having the biggest impact is the Income Bucket Method.
The Income Bucket Method creates a steady income from your business account to your personal checking account using automatic draft. The goal is to create a barrier between the ups and downs of your business and your personal finances. As a small business owner, I realize it can be tough to create this barrier, but I think it’s worth the effort.
By adopting this approach, you will build your Income Bucket to three times your personal budget, then start an automatic draft to your personal checking account. This will provide a stable income for you… just like if you were working a traditional 9-5 job.
*Disclaimer* - It takes time to build income regularity from an irregular income, be patient as you work toward this goal.
Here’s how it works:
Step 1: Know your baseline budget.
List your monthly expenses from highest priority to lowest to figure out how much you need to bring into your personal checking account every month. If your monthly budget is $4,000, that is your target. This baseline is your typical monthly expenses, we will cover savings and other annual expenses in a bit.
Step 2: Set up the appropriate business accounts separate from your personal accounts.
Talk to your CPA* about what this looks like and how you can pay yourself out of your business. Label one of your business checking accounts “Income Bucket.” *If you don’t currently work with a CPA to help manage your your taxes I would highly recommend it.
Step 3: Link your personal checking account to your new “Income Bucket.”
You will set this up on your business account so you are able to send money from your “Income Bucket” to your personal checking.
Step 4: Begin building your “Income Bucket.”
As I mentioned above, you want to have three times your monthly budget in your “Income Bucket” before you start your automatic draft. This will give you a bit of breathing room when you have a couple of slow months.
Step 5: Begin your automatic draft and start receiving your “paycheck.”
Once you reach your savings target for the “Income Bucket” it’s time to start your automatic draft. Business Checking > Personal Checking. You can set this up on whatever interval you like; monthly, bi-weekly, weekly - the only limitation would be what your bank allows.
While the Income Bucket strategy covers your standard monthly, you have other financial goals beyond your current needs. A couple of things to consider: savings and periodic expenses.
For savings (short, mid, long term) and periodic expenses (oil change, haircut, vet bill, travel, etc.) it is a bit more of a manual process. For these categories, I like to set time aside every couple of months to review cash reserves in the business and distribute money to the appropriate personal accounts. This would include sending money to fully fund your emergency fund, retirement accounts, and sinking funds.
At the end of the day, this is about creating consistency. Find what works best for you, create a detailed plan, and be flexible as you carry that plan out. With time, you can create income regularity with an irregular income!