How to Budget with a Variable Income
Budgeting can be hard when you have a variable income.
The ups and downs from week to week or month to month in salary can be unpredictable and make planning your spending impossible.
Let’s take a look at the best way to create a budget when you have a variable income.
What is the Minimum Income You Can Plan For?
The first thing you want to look as is how much income you’ve had coming in over several months to a year.
Out of all those months what is the least amount of money you know you can count on?
Also, look for a pattern of low paying months versus higher paying months.
Is there a trend in months where you know you will earn more? Perhaps your company is seasonal and has periods of time where there is an excess of work and other times when work is slow.
Your minimum income will be your “famine months”.
What is Your Maximum (or High Level) Income You Can Expect?
Conversely, you’ll want to know the most money you can expect to come in. Don’t try to guess that you might make more, base it on data.
It’s much better to be prepared and unexpectedly receive more money than you thought.
Your maximum income will be your “feast months”.
What Are Your Priority Expenses?
When you start your budget, add the most important expenses as priority.
These would include
- Housing – including insurance, utilities, and anything necessary for upkeep.
- Food – just essential groceries for now. Save eating out for times when you have more room in your budget.
- Transportation – including payments for your vehicle, insurance, gas and a maintenance fund.
- Clothing – this might be a small budget, but eventually you or your kids are going to need to replace worn out clothing and shoes.
What Are You Saving For?
The next expense in your budget should be your savings.
The most important is to have a rainy-day or emergency fund.
You’ll want to save at least one-month worth of expenses and grow it whenever possible.
If you have that in place, you can create other savings goals. This category will become important for months when you have lower income and may need to dip into savings to make up for it.
More on that later …
Do You Have Any Debt?
Whether you like it or not, if you are in debt, these payments are a priority.
They may not be as high on the list as the expense it takes to survive, but it’s important to keep paying these to keep creditors off your back and to eventually free up some of your income.
This will be the next thing you add to your budgeted expenses.
Related Article: The Secret to Pay Off Debt Fast
What Other Expenses Do You Have?
After you’ve accounted for all of your needs, you can start adding in niceties.
What are the things that are nice to have, but non-essential?
- TV subscriptions
- Cell phone
- Eating out
- Entertainment (like going to the movies)
- Kids activities (sports, music lessons, extracurricular, etc.)
- Gym memberships
- Amazon membership
- And on and on!
While “niceties” are fun and may even seem essential, you may have months where not all of these items can make the list.
List as many things as you can think of and mark them in order of importance to you. You can highlight them with a marker in different colors or sort them in a spreadsheet.
If worse comes to worse, you’ll know what is the first thing you need to cut from your spending.
Plan Your Budget Around Your “Famine Months”
Now that you know all your expenses, plan your budget based on a low level of income.
What can you comfortably cover in the lean months?
If You Have Extra Money
If you are well within your budget even during “famine months” then you are golden and don’t have to sweat.
Add to your savings for months when you won't have enough to cover everything.
If You Don’t Have Enough Money
Sometimes your expenses will exceed your income during “famine months”.
This is where saving extra during “feast months” will come in. You will be able to live off of extra savings from the months where you made extra money.
Save During the “Feast Months”
When you have extra money, don’t be tempted to splurge and spend it unnecessarily.
Think about your budget and what areas you might go over.
- How many famine months do I expect to have?
- What items in my budget will put me into the negative?
- How much extra money will I need during famine months to make sure I can cover my expenses?
- How many months can I expect to have extra income?
Add up all the expenses that will put you over and multiple it by the number of months you need to plan for them.
Next, divide that number by the number of months that you should have extra income.
- I’ll be over by $200 for 3 months. ($600)
- I’ll have extra money for 6 months.
- For three months I should be about even.
$600 / 6 months = $100 a month
During the 6 months I have extra money, I need to put at least $100 into a “famine month savings fund”.
If you are able to put more than $100 into the fund during those months, then definitely plan to do so. This will save you from the stress of not having enough money to live off of when things are tight.
Over or Under?
If money is tight even during “feast months” you may want to cut back on some of your non-essential expenses.
Another option would be to find a way to make extra money.
If you find that you can live comfortably and make up for the “famine months” with your savings, then you’ll definitely want to move on to trying to meet some of your financial goals.
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