Budgeting With a Variable Income
We often talk about budgeting at this time of year with the being you start off the new year in a positive way with your finances and financial goals.
Budgeting is not always easy. In fact, it’s fair to say, its real work. It takes thought and really looking at yourself and your money habits. Once you’ve done that, there may be fairly significant changes necessary to your lifestyle. But it’s important. And budgeting, planning and tracking is how you will reach your goals.
But what if your income isn’t the same all the time? We just talked about the fact that budgeting can be challenging enough on a stable income, but when your income fluctuates from month to month, it adds an extra layer of complexity. Whether you're a freelancer, a small business owner, or your just someone with irregular sources of income, learning how to budget effectively is crucial for financial stability and peace of mind.
So how can you do this? We have a few tips that may help.
1. EXPENSES – Begin by identifying your essentials for each month. These are things that are truly necessary to meet your basic needs like housing, utilities, groceries, and medical care.
There are a few others that may be on your list as well are insurance, car payments, gas, phone and internet, any loans, and child care.
This is an essential aspect of budgeting on a variable income as these expenses need to be prioritized.
Note: Something to remember is that when money is tight, it's crucial to distinguish between needs and wants and allocate your resources accordingly. So, you start with the essentials, then you move onto allocating funds to other spending categories. Remember, it's okay to adjust your budget as you need to and even reprioritize expenses as your financial situation changes.
2. TRACKING – A great way to get a real look at what’s happening with your expenses is to track all your spending. If you can, do this for at least a month or more. And don’t forget to check your credit card statements and track every dollar you spend there as well.
This is what’s called a zero sum budget. In this instance, you account for every dollar you earn and earmark it as an expense or going to savings. This helps you work through your variable income.
Tracking should be meticulous to insure your numbers are correct.
Note: There is no judgement or any emotion here. You simply need to know where your money is going. If you estimated before truly tracking, your numbers may be off. It’s better to know a real, accurate number so that it doesn’t cause issues later. Don’t sugar coat the numbers. Be real with yourself. It’s the best way to make sure you can cover all your needs.
You can do track a variety of ways including going old school and putting pen to paper. You can use an excel spreadsheet. Or, there are tons of apps you can try. Find the one that works for you!!
3. INCOME – The next thing to consider is how to budget your income. Unlike those with fixed salaries who can predict their earnings with relative certainty, those with variable incomes need to stay vigilant about their cash flow. This means keeping detailed records of all sources of income.
Budget based on your lowest monthly income is the recommended tactic. It’s better to be conservative than overestimate and fall short.
Once you know your income, you can budget for those most pressing expenses first. Then, if you have more than expected you can start taking care of other wants or needs. Those are the non-essential expenses. And let’s be honest, we all need those things to be happy! A fun cup of coffee, a new video game, a new purse or even a weekend away. The money you have over the essentials can be budgeted for those things.
4. SAVE - However! Make sure some of that surplus is being saved. There are several advantages for doing this.
Variable incomes generally come with the dreaded "feast or famine" cycle. You may experience great periods of outright abundance! And that may be followed by droughts. Which is most likely your biggest challenge, right?
You want to plan ahead as much as you can for those times. If you know there are going to be times where you have higher expenses for things like travel, the holidays, back to school or even things like renewing a professional certification for the work you do, it’s best to set aside money for these instances.
Conversely, are there times you know are usually slow and your income will be down? Putting aside money to carry you through those times is important as well.
And just like anyone budgeting, saving for goals is important. This could mean saving for a big vacation, a big purchase, a home or even a car.
Note: You can have multiple savings accounts remember?
So, you can set up different saving accounts for your different needs. Paying yourself for lien times, saving for goals or saving for emergencies.
An emergency fund can actually be crucial, especially on a variable income. You never know when things outside of your control will affect your income levels. Having money set aside could help out during those “famine” times, not to mention for true emergency situations like vehicle repair or illness.
Having that account can truly bring peace of mind. Three-six months of expenses is the recommended number, but many agree that for those with variable incomes, you may want even more. As much as a years worth of expenses is recommended. If you aren’t sure how much you need, look back and think about how long it takes you to find a new source of income to use a guide.
If you can’t put money in each account every month, that’s ok. Prioritize your goals and add to the accounts accordingly as you can. Even small amounts will help.
5. KEEP YOUR BUDGET HANDY – Refer to your budget often. Especially, when you go outside those essential expenses we talked about. Make sure you are referring back to your budget and that you are on target before you spend. This can help you not impulsively spend!
6. BE FLEXIBLE – Lastly, let's talk about the importance of staying flexible. Budgeting on a variable income really requires that you be willing to adapt and be resilient. While it's great and truly essential to have a plan in place, sometimes plans need adjusting. After all circumstances change. Whether it's finding new sources of income, cutting expenses, or renegotiating bills, it’s important to keep at it. Adjust and make a new budget when you need to. Know that mistakes will be made! And that’s ok. You learn from those right? And you keep going! And you do the work to stay on track so that you know your bills are paid and that you are reaching your goals and you are able to have fun and enjoy your life.
BONUS TIP
When you are on a variable income that often means you won’t have investment accounts through a company or retirement accounts. Don’t neglect those though! Planning for your future is still important and there are options for retirement plans in particular that you can take advantage of on your own. Ask your bank or credit union what accounts they offer or even consider meeting with a financial planner for some guidance.
Budgeting with variable income is absolutely doable and you can do it successfully. Just Remember, managing your finances effectively is a journey, not a destination and it’s not one size fits all. Find what works for you! Stay informed, stay disciplined, and remember to be flexible. You CAN take control of your financial future and achieve your financial goals.