Here are 5 steps to build a budget if you don't have a steady income
For most Americans, their monthly pay isn't consistent or predictable, making it challenging to estimate how much they have to cover things like food, rent, utilities, cell phone bills and even going out with friends. The average American family routinely experienced a 36% change in income month-to-month from 2013 to 2018, according to a recent report released by JPMorgan Chase Institute.
And if your income varies each month, it can make building a budget — already a challenge for many Americans — very difficult. But Tiffany Aliche, personal finance expert and founder of The Budgetnista, says it's not impossible to create a simple and realistic budget, even if you don't have a steady income stream.
Here are five steps Aliche recommends taking in order to build a budget if your monthly income tends to fluctuate.
1. Calculate your 'noodle budget'
The first step to creating a budget, Aliche says, is to figure out your financial baseline, something she calls the "noodle budget." If you have to eat only Ramen noodles — and we've all been there — and pay for the barest basics such as rent and utilities, what is the lowest possible amount that you can spend?
"That is your noodle budget, and you don't have to live there, but you should know what it is on paper," Aliche says. Once you calculate what that dollar amount looks like, then you know exactly how much you need to make a month to eek by.
2. Live by percentages
When you have a regular, steady income, you live and die by the number on your paycheck. If you make $2,000 a month, typically you allocate your budget based on dollars. Maybe $500 goes to rent, $200 toward transportation and $100 for utilities, for example.
But if you have an irregular income, your need to start thinking in percentages because your income is going to vary. First, you'll need to set aside at least 20% to 25% of your income for taxes, Aliche says. Remember if you're self-employed, generally you need to file an annual return and pay estimated tax quarterly. "I like to work with the taxes first because Uncle Sam don't play," she adds.
Next, set aside a percentage for living. Remember your noodle budget? That's why you calculated it. Look at what you're typically bringing in and then calculate what percentage that is of the entire typical monthly pay. You may want to play around with the math a bit, since the noodle budget is the baseline, and you'll likely want room to eat out and perhaps pay for some extra expenses such as gym memberships. This is going to be a big part of your budget, about 30% to 40%, perhaps even up to 50%.
Then you're going to want to set aside money for savings and debt as well as something for having fun. This portion can be anywhere from 25% to 50% of your monthly income depending on how much you set aside for general living expenses and taxes, as well as how much debt you have to pay off each month.
3. Separate to see the big picture
Sometimes you need to separate your money to see what you actually have, Aliche says. She recommends that you have multiple accounts dedicated for specific purposes. First, have a deposit account where employers can directly deposit your pay.
Then Aliche recommends having a separate account just for bills, as well as multiple savings accounts. "I actually believe chopping up my savings accounts into big, major goals. I might have a house savings, a car savings, and a big old birthday party savings," she says.
A number of online banks such as Ally and credit unions like Alliant allow multiple, free savings accounts. Some banks, like Capital One, even allow customers to have sub-savings accounts, rather than open up separate accounts.
4. Pay the pot
Perhaps the most important step when you have an irregular income is to pay the pot and let the pot pay you, Aliche says. What does she mean by that? Let's just say your noodle budget is $2,500 a month. This month, you made $10,000.
You are going to deposit that $10,000 into your main account, the pot. "The pot is going to pay your noodle budget or better," Aliche says. So maybe you tell yourself: I would really like to have a budget of about $3,000 a month, so the pot is going to pay you $3,000 this month and you can transfer that money into your "living expenses account." Then put what's left, $7,000, away in savings.
Next month, maybe you only make $2,000, but that's OK. The pot can still pay you $3,000 because you put that extra $7,000 away the month before. So you put $2,000 into your living expenses account and withdraw $1,000 from savings to make up the difference.
5. Be like a squirrel
Squirrels (yes, the animal) are super savvy savers, Aliche says, and she wants you to do the same because most of us are terrible savers.
Here's what happens when you get a raise or a bonus — and we've all done this — it turns into: Drinks on me. Drinks on me. Drinks on me.
Not squirrels. When there are a ton of acorns in fall , squirrels tend to work the hardest and gather as much as possible. Humans tend to do the opposite, Aliche says. "When money is flowing in...we tend to spend the most," she says.
But Aliche recommends you do the opposite: be like the squirrel and when you have money really flowing in, lean in, work harder, and save the most.
CHECK OUT: Why January is a particularly great time to invest your money via Grow with Acorns+CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.