Budgeting on a Variable Income

Woman looking at bills and receipts on floor
•••

David Sacks / Getty Images

Budgeting on a variable income can be difficult. If you are self-employed or you work on commission only, you may be faced with managing a variable income. This means that it can be difficult to predict how much money you will have coming in during a given month. If this is your reality, it is important to save a large percentage of your income on good months to make up for the bad ones. Here is one way to budget your variable income.

List Your Monthly Expenses

First, list all of your expenses the same way that you would with a normal budget. This allows you to see where your money needs to go. After you have listed all the expenses, add in what you plan to put into savings. Try to shoot for 10% of your average monthly income.

If you are self-employed, you need to add in your taxes as an expense. You may want to have a separate savings account for taxes and one specifically for saving for months where you do not make as much money.

Make sure that you have a fairly tight budget the first few years that you are self-employed or otherwise managing a variable income. You may not realize the first year or two that your work is seasonal or that it comes in cycles. There are many ways to save a little more every month, from skipping lattes to shopping store brands.

Prioritize Necessities

You will need to prioritize your expenses and take care of the basics first—this includes necessities such as food, shelter, electricity, and health insurance. After that, you should list your debt payments and savings contributions. Then you can add in expenses for clothing, gym memberships, and entertainment. On the months where money is tight, knowing exactly where your money goes will help you budget if you need to cut back your spending on things that are not necessities, such as entertainment and eating out. 

Save the Remaining Balance

Once you know how much money you will make in a specific month, subtract out your expenses. While you should always try to save at least 10%, it is especially important to remember to save anything you make over the amount of your full budget. Put this extra amount into a savings account—separate from your emergency fund and other savings goals—to use as a buffer for the months when your income is lower.

One exception to the savings rule: If you are working on getting out of debt, you may decide to put a percentage of the leftover money toward paying extra on your debts.

Cover Shortages

If you have a slow month, take the money out of the account that you have set up to cover those downturns. During these months, you may also want to scale back on unnecessary spending so that you do not drain your savings account completely. This will also give you more motivation to work harder so that you do not need to cut back. Generally, you should not be taking out money from this account to cover fun expenses.

Save Up and Pay Yourself

Once you have saved enough to cover two months worth of expenses, you may want to have your paychecks direct deposited into that savings account. Then you simply transfer the amount of your budget into your checking account at the beginning of the month. This helps you to continue to meet your expenses and save. This can be especially helpful when budgeting a commission-only income. Be sure that you always have at least two months income in this account once you reach this point, so you can adjust your spending as needed in case you have a few slow months in a row.

Find Ways to Supplement Your Income

It helps to have multiple income streams in place if you are dealing with income fluctuations. A second job or a side business from home can create additional income for you and ease the ups and downs. You can also take on seasonal work if you notice that your income drops at specific times during the year.

A variable income presents a budgeting challenge, but it's not an insurmountable one. With a little planning and smart money management, you can learn to deal with the ebbs and flows effectively,