Living on an uneven income does add some complexity to budgeting and managing your expenses, however with the right system and a bit of discipline it does not need to be difficult.
In my previous blog I outlined the two broad categories of uneven income as:
The Seasonal worker – This sort of income is typical in industries such as farming, sales and tourism where income comes in lumps followed by long periods of little or no income.
The Penalty Rate Worker – This type of ‘uneven income’ occurs when you work shift work or in a job that includes overtime penalty rates.
In part 1 of this series, How to Budget on an Uneven Income Part 1: The Seasonal Worker, I discussed the strategies for budgeting as a Seasonal worker. In this blog I will outline how to budget on and uneven income when you are in a shift work or penalty rate occupation.
The biggest difference between the seasonal worker and a penalty rate worker is that a penalty rate worker typically has a baseline or minimum income that can be relied on all year round. Where the difficulty comes in for the penalty rate worker is knowing how much you will receive over and above that baseline income in any given month.
The best place to start when budgeting to an uneven income is to identify how much you have earned over the past 12 months and divide it by 12 to give you an average monthly income.
By taking an average you smooth out the lumps and bumps and give yourself a realistic starting point for an income you can budget too.
Of course, given it is an average income figure there we will be months where you earn more than your budgeted income and months where you earn less than your budgeted income. You would expect your budget to look something like this:
There are two strategies we use to help minimise the impact of these monthly variations.
Budget to a slightly lower income
Our first and preferred option is that you budget to a slightly lower income. After all, the point to budgeting is to manage your expenses and try and save money. Instead of basing our budget on the average $3,000/month which is using all our estimated income, adjust it to $2,800. Not only will this mean that we are saving $2,400 across the year but our cash flow would look something like this:
You can see that managing your budget to this slightly lower income has three very positive effects. First, there are fewer negative months. Second, those months that are negative are far less negative. Finally, we have managed to save money, $2,400, throughout the twelve month cycle.
If you had the capacity to bring the budgeting income back even further, to say $2,700 or $2,600 the benefits would be that much greater.
Hold a cash buffer, equivilant to your greatest monthly variation
The second method of dealing with these monthly variations is to hold a cash buffer in your central budget account that is equivalent to your greatest monthly variation. Looking at the first table above your greatest negative month is $365. For this, you want to set up a buffer Jar (expense category) in your budget that always holds at least $365. This ensures the balance of your bank accounts never get too low following a month of lower income. If you are extra cautious you may want to add a little more to cater for the potential of two or three negative months in a row. Once the buffer account is in place and funded, you never need to worry about the month to month variations.
Budgeting to an uneven monthly income does add complications, however with proper money management through this systematic approach, these complications are easy to overcome. Remove the noise that comes from the monthly variations and identify your average monthly income. Build your budget around your monthly average income and use the strategies outlined above to reduce the impact of those inevitable lower income months.