How to budget on an irregular income in Alberta
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As life gets more expensive, many Albertans are taking on side hustles or turning to the gig economy to help pay the bills. There are also thousands of self-employed or contract workers in the province. The challenge that comes with a non-traditional job is that you can’t expect a consistent paycheque. One month it’s up, the next month it’s down. This can make budgeting difficult.
So, how do you manage your money when you don’t have a predictable paycheque?
Reframe your budget
Budgeting is still possible with irregular income, you just have to take a different approach.
Instead of basing your budget on income, which can change each month, anchor it in your expenses.
Ask yourself, “How much money do I need each month to cover my bills, savings, and taxes?”
Financial planners call this expense-based budgeting, and here’s how it works.
First, add up your regular expenses:
- Fixed expenses. These expenses stay the same each month, like your rent or mortgage, utility bills, or car payments.
- Variable expenses. These are things like groceries, gas, and entertainment. They change from month to month, and you have the ability to cut down on these expenses if needed during slower income months.
- Savings. Decide how much you want to save for slow income months, emergencies, or other goals.
- Taxes. If you have a side hustle or you freelance, it’s up to you to set money aside for taxes. Failing to do so can create problems at tax time. More on this below.
Add all these categories up, and you’ll know exactly what you need to cover your monthly expenses.
For example:
- Fixed: $3,000
- Variable: $800
- Savings: $250
- Taxes: $300
Total monthly expenses: $4,350
That number is your target. From here on, your job is to make your income work around it, not the other way around.
Calculate your income
Now take a look at your income.
Pull up your bank statements for the last 12 months and add up every dollar that came in. This might include your employment income, side hustle, benefits, or alimony.
Then calculate your average monthly income:
For example:
- Employment income: $3,000
- Side hustle income: $1,200
- Benefits: $300
Total monthly income: $4,500
Comparing your average income with your monthly expenses can help you see whether your current budget is realistic.
In this example, there’s about $150 left after the $4,350 budget. If your average income is lower than what you need to cover your expenses, that’s a sign you may need to reduce spending, increase your income, or both.
Give yourself a regular paycheque
One strategy that can make irregular income feel more predictable is using a holding account.
The idea is simple: Your income goes into one account, and you pay yourself a consistent amount from that account on a regular schedule.
For example, say your monthly budget requires $4,350.
During a good month, you might earn $6,000. Rather than spending the extra $1,650, you leave it in your holding account.
Then, when your income drops during a slower month, you can use some of that money to pay yourself your regular $4,350.
You’re essentially creating your own consistent paycheque.
You can also use separate accounts for different purposes. You can create one for your:
- Fixed expenses
- Variable expenses
- Savings
- Taxes
You don’t necessarily need separate physical bank accounts, just a way of categorizing the different priorities.
This system can help you avoid reaching for a high-interest credit card or line of credit when work slows down.
Automate deposits and transfers
To keep things running smoothly, consider setting up automatic transfers.
First, you can set up auto-payments, so your regular paycheque, side hustle income, and government benefits go directly into your holding account.
Then, set up regular, scheduled transfers from your holding account into your fixed, variable, savings, and tax accounts. This way, you don’t have to think about setting money aside, and you won’t be tempted to spend it.
For example, each month you transfer money from your holding account to your operating accounts in the following amounts:
- Fixed: $3,000
- Variable: $800
- Savings: $250
- Taxes: $300
Total monthly expenses: $4,350
Don’t let your tax money disappear
Taxes are one of the biggest challenges associated with working for yourself.
In a traditional 9 to 5, your employer is responsible for withholding all necessary taxes, including Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. When you’re self-employed or working in the gig economy, the responsibility falls on you.
This is where some self-employed Albertans are often caught off guard.
You receive a $5,000 payment for work, see the money sitting in your account and assume you have $5,000 to spend. But some of that money will need to go to your tax bill.
There isn’t one savings percentage that works for everyone. Your tax situation depends on factors like your income and deductions. As a rough starting point, some people set aside 25% to 30% of their income for taxes.
If you’re self-employed consider working with a tax professional or bookkeeper to estimate how much you should be setting aside. You can also use a tax calculator to get a general idea of your tax obligations.
And remember, if you need to collect and remit GST, this money needs to be treated separately from your income tax savings.
If tax debt is already piling up, you don’t have to figure it out alone. One of our Certified Financial Counsellors can help you look at the bigger picture and determine what steps to take next.
More on emergency savings
When it comes to your savings, you want to build up an emergency account. Ideally, you should aim for three to six months of living expenses, so you’re prepared if you lose your job or have to deal with an unexpected cost.
To figure out how much you should save, you can do a simple calculation.
First, determine how much you need each month to get by. You can use our Emergency Savings Calculator to get started.
Remember, your emergency fund isn’t meant to cover all of your regular expenses, such as subscriptions, birthday presents or dining out. It’s meant to cover your fixed expenses, taxes, and modified variable expenses.
Next, decide how quickly you want to get to three to six months of savings.
For example, let’s say you need $3,000 per month to get by. Your goal is to save three months’ worth of expenses ($9,000) within two years, that’s $375 a month.
$9,000/24 months = $375 per month.
If that number feels out of reach right now, start smaller. Even if you only put away $39 per paycheque every two weeks, you’ll have over $1,000 saved in a year. Having cash available in your emergency savings can downgrade an emergency into a convenience.
To get to your savings goal sooner, put any spare change or cash windfalls into your emergency account. This way you’ll have some peace of mind if work slows down or a client is late paying you.
Ask for help
Budgeting with an irregular income takes a little more planning. You need to account for good months and slow months, keep an eye on your taxes, and make sure you’re not spending the money that needs to cover future expenses.
And if you’re already struggling to make ends meet, adding another spreadsheet or budgeting app probably isn’t going to solve the problem on its own.
This is when it can help to talk to someone. A Certified Financial Counsellor can help you build an expense-based budget, figure out how to manage your irregular income, and identify ways to deal with debt or tax obligations.
Don’t wait until things are out of control to ask for help. Give us a call at 1-888-294-0076 or fill out our online contact form to speak with one of our Certified Financial Counsellors. There’s no cost, no judgment, and the call is confidential.
