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Budgeting with Variable Income

December 4, 2020

If your income varies, you know how great it feels when you make a lot, along with how stressful the lean times can be. Whether you work on commission; are a freelancer, contractor or gig worker; or your work schedule is unpredictable, you can’t always manage the size of your paycheck while the bills keep coming. Budgets are important for everyone, but they’re even more important to help you manage the ups and downs of irregular income.

When you put together a budget, the most important step is to put together something that works for you, whether that’s an app, Excel spreadsheet, or piece of notebook paper. The order of the following steps isn’t set in stone, but it’s important to do all of them.

Determine your income.

There are two ways to approach your income. You can work with your lowest possible monthly income OR use a monthly average. (To determine a monthly average, total your bring-home pay over the past few months, divide that amount by the number of months and you have your average monthly income.) Using the average is safer if you have an emergency fund or your income doesn’t vary greatly.

It’s important to be realistic with your income amount – no one wants to be in the hole every month because their budgeted income is too high.

List your expenses.

Start with the essentials – things you really can’t live without like your rent/mortgage payment, utilities, insurance, medicine, etc. These are items that can’t easily be eliminated. This is your baseline budget and reflects the absolute minimum you need to earn.

Now add on the extras – cable, cell phone plan, entertainment. Try to be as honest and realistic as possible. A budget isn’t a punishment – while you should try to be frugal with your expenses, don’t set yourself up for failure from the beginning. When considering your expenses, don't forget bills that aren't paid monthly like property taxes or insurance payments.

An especially important category to include as an expense is savings. While everyone needs to include savings in their budget, it’s absolutely necessary for those with variable income. At the least you need to have a “slush fund” savings account to cover low income months and emergency expenses. Ideally, you’re including multiple savings accounts, like retirement, mortgage down payment, vacation, etc. (If you’re not including these at the beginning, don’t get discouraged. Being able to save for the future without going into debt is the point of a budget.)

Hard choices might be necessary.

As you work on your budget, some ugly truths can come to light. A few examples:

  • You have no emergency fund or savings of any kind. This can be a difficult realization under the best of circumstances. There are a few things you can do to kick start a savings account – sell possessions, take on a second job or a side gig, cancel subscriptions or memberships and put that money immediately into savings – you can find a million ideas online.
  • Your expenses are too high. Obviously this stinks, but it’s better to realize it now than to live on credit, oblivious to the hole you’re digging. Even if you make enough to cover your monthly expenses, it’s a good idea to evaluate everything to see where savings are possible. Call around for insurance quotes, compare the interest rates on your credit cards, determine if you really need every pay channel or a gym membership. It’s amazing how much money you can cut from your budget if you’re willing to make some sacrifices.
  • Your income is too low. If you’ve cut your expenses to the bone and still don’t make enough to pay them without borrowing, it’s time to make some hard choices. What can you do to increase your income? How much can you realistically expect to make? This is a good time to talk to someone who’s advice you trust – a friend, mentor, banker, financial advisor, etc. There are organizations you can contact like The Salvation Army, Catholic Charities, and the United Way to name a few. Check out sites like Find Help Paying Bills or call 211 to find assistance in your area.

Monitor and adjust your budget continually.

It’s important to keep track of how accurate your budget is, especially in the beginning. If you’ve overestimated your income, or underestimated your expenses, make corrections. Your short-term goal is to get as much as possible in your slush fund account. Making those “payments” is just as important as every other bill you have, because this is the money you’ll use to cover unexpected expenses or a low income month.

If you monitor and adjust your budget, it will become more accurate over time even with a flexible income. Ideally, your expenses will remain fairly consistent, or even go down if you’re paying off debt. Seeing the amount you can save each month increase is the ultimate pay off of budgeting.

The bottom line is that while it might be a bit more challenging to budget based on variable income, it really does pay off in the end.

Additional Resources:

Budget Vocabulary Words

Budgeting Vocabulary

Why isn't my budget working?

Why isn't my budget working?

50-30-20 Budgeting Rule

50-30-20 Budget Rule

The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.