Keeping on a budget when your income is unpredictable

Feast or Famine Budgeting

by Gary Foreman

Hi Gary,
How do you budget, not get into debt, and get out of debt when you have an unpredictable salary such as a lawyer who's pay is based on contingency or a real estate agent who's pay is based on selling property sporadically? I have several friends in this position and it seems impossible to figure out a feast or famine budget.
J.D. of California

JD asks a good question. And it's a question that effects anyone who can't predict when and how much they'll be making.

We'll start our discussion by considering what a budget is and what we want it to do. When most people think about budgets they picture a straightjacket to keep them from spending money. But that's not true. A budget is really just a plan. (Now isn't that a much friendlier term?)

The plan will show what you expect in income and expenses for the budget period (usually one year). You'll also be able to compare income and outgo to see if you're planning on spending more than you make.

What else do we expect a budget to do? Well, once we get part or all the way through the budget period we'll be able to compare our actual experiences to our plan. Just like tracking a roadmap on a vacation. We'll be able to tell whether we're on course or if we need to make corrections.

Expert Interview: Why You Need a Spending Plan Instead of a Budget

Now that we know a bit about budgets, let's look at JD's question. Most people have a steady stream of income. Yes, they could get a raise in October, but income will stay steady from week to week. Usually the biggest issue is what to do with the month that includes an extra paycheck.

With a steady income the biggest trick is to try to level out expenses. Every family has a couple of expenses that only occur once or twice a year. Property taxes, holiday gifts, auto repairs are all good examples. You handle these items by estimating the yearly expense and then setting aside an equal amount each week or month that will add up to the yearly amount.

But what about JD? What do you do when you get a big check one month and nothing for the next two months? Doesn't that make using a budget impossible? No, in fact it makes using a budget even more important. Just as you're more likely to use a roadmap when you don't know where you're going, you need a budget when your income varies throughout the year.

How do we do it? The strategy is simple. We're going to begin with a conservative estimate of our annual income. Put the emphasis on 'conservative estimate'. Suppose you're a real estate agent and last year you make $30,000. But all of the income came in only a few deals. Take a realistic look at the year ahead. How much income are you likely to make if most of the breaks go against you? Half? Two thirds? You decide, but remember to estimate LOW. This is the level of income that you're counting on unless the year is a complete disaster.

Not sure where to start with making a budget? The affordable Home Budget Spreadsheet from makes budgeting simple.

Now take that income and compare it to your expenses. Make sure that both income and expenses are for the same period of time. Chances are that you're planning on spending more than your conservative income estimate.

The first key to success is to reduce your expenses to match your low income estimate. No, that doesn't mean that you're not getting the new TV. What it means is that if you're income doesn't exceed the low level you won't get it. Or any of the other extras. Keep a list of the items that are 'nice' but not necessary. When you get towards the end of the year and your income has EXCEEDED the low level, then go out and buy the items that you listed.

This does two important things. First, if you do have a bad year (and we all do) you won't get to the end and realize that you've spent all your savings. Second, if you work on commission you'll have the motivation to perform throughout the year to achieve the bonus goodies you've planned for yourself.

Right now you're probably saying to yourself that we still haven't solved the fact that income comes in without regularity. And you're right! So let's do that.

You'll need to maintain a savings account large enough to cover expenses in the months that have no income. You know your business. What's the longest stretch that you'll go without income? You'll need a savings account that equals your expenses during that time. Since you have a plan you'll be able to estimate those expenses with some accuracy.

Some people keep the savings in their regular checking account. Others use a separate account. Whatever will work for you is fine. Just remember that when you do get that 'windfall' check you must replenish the account for the next dry spell.

What if you don't have any money saved? Then it's going to be harder. You'll be using borrowed money, probably credit cards, to cover the lean months. But it's not impossible. You should be making more than your low level income estimate. When you do pay off the cards and use any extra to fund the savings account. It may take awhile to get your saving built up, but it's essential to your success.

One warning. It's dangerous for you to make time payments. Houses, cars and credit card purchases are all tempting with their easy monthly payments. While no one expects you to pay cash for your first house, it's important to keep those monthly commitments to a minimum. Remember, that anytime you buy something on time you've increased that monthly minimum you'll need to earn. More pressure that you don't want.

Use these guidelines to choose the best plan to pay off your credit card balances.

It's also tempting to think that you don't need to worry about spending plans or budgets. Just close a couple of more deals and watch the income soar! You can do that. But if you're living on your credit cards today, you'll still be living on them when your income has doubled. And you still won't have a plan.

Can you do it? Sure! People who scramble for every transaction are usually quite creative. You'll find that once your personal financial affairs are kept in order, all that creative energy can be used to close more deals. And isn't that what you really want?

Thanks to JD for an excellent question.

Take the Next Step:

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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