How to Budget Without Regular Paychecks

Successful budgeting tends to depend on two things: careful planning and a steady income. The first, anyone can do. The second may not be so simple.

If you’re self-employed, you might be asking yourself, “But I don’t have a regular paycheck coming in — can I even set up a budget? Should I bother?”

You can. And, yes, you definitely should.

A budget is simply a way of figuring out how much money you need to go about your daily life, and arranging things so that you don’t exceed that number. Whether you track every penny and every expense, or just keep on eye on a few problem areas, a budget helps you succeed financially.

Budgeting when your income isn’t predictable can be tough. But, actually, it’s especially important if you have an irregular income. Who might have an irregular income? If you fit into one of these categories, I’m talking to you:

freelancers,
temp workers,
consultants,
artists,
permanent employees with fluctuating hours,
commissioned salespeople,
those doing seasonal work,
people will tip-dependent income,
owners of a small or startup business,
on-call employees,
or simply odd-jobbers.

If any of the above apply, this article is for you. Keeping track of your incoming funds and knowing where your money then goes are incredibly important to maintaining financial security when you don’t get a predictable paycheck from your 9-to-5. Below is one three-step method to creating a budget when your income isn’t predictable.

Step One: Know Your Baseline

When you have a steady paycheck and a predictable income, can make a zero-based budget by allocating spending categories within that predictable limit. But those with unpredictable incomes must work backward — starting with the amount of money you’ll spend, in order to figure out how much you need. If your income is unstable, then it is your expenditures that must be stable, predictable, and repeatable. According to the 50/20/30 rule, there are three categories of expenditures: Essentials, Priorities, and Lifestyle.

Your baseline expenditures are those in the Essentials category — those that must be paid every month, without which you can’t live. Of these, the first costs you’ll want to estimate are:

1. Groceries

For your baseline, include the lowest food cost that is reasonable for your circumstances. Plan your grocery expenditures without any extras, like restaurants, coffee shops (unless you must use them to have business meetings or to avoid paying for internet at home), wine, or fast-food pit stops. If you’ll be couponing and cutting back your food costs, take that into account. However, if you know you won’t actually clip a single square, be realistic about your cost estimates. One of the best ways to get an estimate is to track your spending for a few weeks to get an idea of how much you spend.

2. Housing and utilities

For almost everyone, essential expenses include rent or mortgage. If you’re responsible for either — even if you house-share, live rent-free, or have a sliding rent arrangement — include your minimum monthly housing cost in your baseline. Make sure to include the monthly amount for homeowner’s or renter’s insurance and property tax bills in your total.

If you live in a geographic region in which heating or air conditioning is essential, include these average monthly bills in your baseline. In moderate regions, utility costs are a lifestyle choice. But heat isn’t optional in January in Vermont!

The same goes for internet and phone costs. If you work from home, they’re most likely a necessity and should be included in your housing and utility estimate.

Cut the Cord: Reducing Your Costs for Cable and Cell Phone Services

3. Medical costs

A note about health insurance: The number-one reason people go bankrupt is because of medical costs, so it could not be more important that you have some form of health insurance. You should include these costs in your baseline estimate, as well as payments for any outstanding medical bills. Also, look at how much your basic medical care, including annual check ups and standing prescriptions, cost on an annual basis. Divide that out by 12, and you’ll see how much you should add to your monthly medical costs.

4. Transportation

Do you need to include transportation to work in your baseline? If you rely on a car or even the public bus system to get you to and from work, you definitely do. Consider the lowest possible transportation cost given your job or jobs. Do you absolutely need a car, auto insurance, maintenance, garaging costs, and gas expenses? Or is there great public transportation in your city? Can you walk to work? Telecommute? Can you infrequently taxi, Uber, ride-share, Zipcar, or call for delivery?

Again: Be realistic with your estimate. If you’re actually going to drive your SUV alone, round-trip, every day, factor that into the costs.

5. Childcare

This expense is rather like transportation. If you must have childcare to be able to work, then you need to factor it into your budget. If you can work without having childcare (like if you can work from home on a flexible schedule), you may not need to budget for full-time childcare — or any childcare at all. Again, be realistic with this figure, though.

For instance, maybe you run your own business and could get away without paying for childcare if you had to. But if you stopped paying for your part-time slot at a local daycare, you’d lose your spot. Then you’d risk paying much more for childcare, or, worse, not being able to find a quality replacement, when your business picks up. In this case, the minimum you pay for part-time childcare should be part of your baseline budget.

How to Save Money On Childcare Costs (Our 32 Favorite Ways!)

Add up the baseline numbers, and you have the amount of the essential monthly “paycheck” you’ll write to yourself.

Step Two: Set Your Income Target

This step is easy (well… sort of). Once you know your monthly baseline expenditures — and thus the paycheck you’ll have write to yourself each month — use an online tax calculator to get a rough idea of how much you’ll owe in taxes.

Your base income plus taxes makes up your bare-bones monthly income requirement. The tricky part, of course, is guaranteeing you have enough income to meet your expenses.

Anything above this bare-bones income target goes to your financial priorities: first savings and/or paying off debt, and then additional lifestyle costs.

Step Three: Set Up Separate Bank Accounts

To make this plan most effective, you’ll want to set up separate bank accounts. Most banks will let you have as many accounts as you need, and you can often get these accounts without fees. Or ask your bank about its policy for maintaining a combined minimum account balance in order to avoid fees.

If your current bank won’t waive fees, consider switching banks to one that offers free checking and savings accounts. Otherwise you could have to add a hefty amount of bank fees to your monthly baseline budget, which is not a good thing.

1. Business checking

Here, you’ll have your checks auto-deposited. You’ll plunk your daily cash from tips, if you get them, and you’ll deposit your invoice payments from clients. You’ll make only three transfers from this account each month: one to each of the below accounts.

2. Personal checking

From this account, you’ll pay all your bills — essentials, priorities, and lifestyle — but you won’t spend more than you’ve paid yourself any month. This account will also receive any monthly “bonus” you might want to pay yourself when your income exceeds your target, and you have money left to spend beyond your savings (which is technically a fourth transfer).

3. Emergency savings

Every month, after you’ve paid yourself your baseline and transferred amounts for financial priorities, you’ll put money into your emergency fund.

You should be aiming to save at least six months’ worth of expenses in this account, to be used in the following situations only:

You’ve lost your job and need to continue paying rent, bills, and other living expenses.
You have a medical or dental emergency.
Your car breaks down, and it’s your primary form of transportation.
You have emergency home expenses — e.g., your AC breaks down in 100°F-plus weather, your roof is leaking, your basement is flooded, your toilet is overflowing, etc.
You have bereavement-related expenses, like travel costs for a family funeral.

4. Priority savings

This account holds money for annual or semiannual payments (income taxes, property taxes, home insurance) and for important goals — payments on student loans, the down payment for a house, contributions to your retirement accounts, or college savings for your child.

Learn More About Renter’s Insurance… and Whether You Need It

That’s it! You now have a basic budget, your income target, and where exactly your money should go… no matter how it comes in.

This isn’t the only way to budget if your income is variable, especially if you have a steady paycheck plus an unsteady income from a side gig. But this is one way to make sure that your basic expenses are covered, and that you don’t out-spend your earnings when you have an unsteady income.

Do any of these methods work for you? What’s your biggest financial struggle with unsteady paychecks?