Whether you’re working for yourself or have an irregular job schedule, budgeting on a variable income can be tough. If you are one of the 30% of American workers who are self-employed or work as a freelancer or a contractor, your income is dependent on how much work you do — and sometimes the work you’re doing now won’t pay for another 30 to 45 days!
If you work in the service industry or another hourly job with a rotating schedule, your hours and income can vary from week to week. Similarly, if you have a sales job where you earn a commission, it can be hard to determine what your actual income will look like at the end of each month.
So how do you budget when you don’t know how much you’ll be making? While it may seem that budgeting with a variable income is impossible, there is a way to best approach your finances that will allow you to be successful with managing your money.
Budgeting when you have a variable income
A budget is a plan for your money. When you have a predictable monthly income, creating a budgetthat works for you is a little more straightforward (though it still has its challenges). When your income varies, making a plan for your money can be more work, but it can be done. Here are three tips to help you create a successful budget on a variable income.
1. Create your baseline budget
You can also call this your bare minimum budget. The total amount of these expenses is the minimum amount of money you'd need to earn each month. This includes necessities like your rent/mortgage, utilities, food, and transportation. This does not include going out to eat, shopping, or entertainment — remember it's the bare minimum amount of money that you need to get by.
For some of these, you’ll know exactly how much you’ll be spending every month (e.g. rent/mortgage). For others, you may have to do some digging to figure out how much you should expect to spend.
You can use a number of budgeting tools and templates to categorize past expenses and determine how much you’re spending every month. For example, you can use Mint to figure out how much you’ve been spending on groceries so that you can use that number in your baseline budget for the current month. But you can also use a simple spreadsheet to track your spending.
2. Prioritize your expenses based on your variable income
Once you create your baseline budget, the next step is to prioritize your expenses in order of importance. This means determining what bills need to be paid first, second, third, etc. For instance, housing, food, and transportation could be items 1, 2, and 3 on your list.
Having this priority in place ensures that you are properly allocating your money to your top budget items first when you get paid. So even if your paycheck does not cover everything in your budget, you have the important things paid for despite your variable income.
This may also involve making some difficult decisions and cutting things that you can’t currently afford, like going out to eat or that Netflix subscription. While you’re figuring out your budget, it’s important to remain focused on your goal and stop spending on non-necessities.
If you do find that you’re not able to allocate funds to each of these other lower-priority categories, then you can take steps to increase your income. Get a part-time job, review your products and services, etc. This way, aside from just paying expenses, you can start to save and invest too.
3. Plan for future months during the months you earn more
Having a variable income means you’ll have good and not-so-good months. You can hope that your income will increase over time, but that’s not always the case. Lots of factors, like seasons, can factor into how much you’ll be making.
If you happen to earn more money in a certain month, pay for your most important expenses first (as discussed above), then put aside some money in an emergency fund. In fact, you should make it a point to contribute to your emergency account before you spend your money on any non-essentials.
These savings will help you will in future months in the event that your income declines again or if you have unplanned life circumstances that require you to spend a lot of money at once. This way you can cover your expenses during those months without having to leverage debt.
It's also a good idea to establish a sinking fund. This fund is specifically for large upcoming expenses that you know you'll need to pay for.
You can budget successfully on a variable income
Putting a plan in place regardless of your income is the foundation to being successful with your finances. It's all about managing your expenses according to your income, whether it varies or not. Plan to revise your budget every single month and if you fall short, each new month is an opportunity to do better with your budget. Remember, you can budget successfully on a variable income.