For some of us, a stable income isn’t part of the financial picture. Whether you work on an hourly basis, and aren’t assigned the same number of hours each month, or whether you are self-employed and never entirely sure about where your next paycheck will come from, it’s vital to know how to budget when you have a variable income.
Add Up Your Monthly Expenses
The first thing you need to know is how much you spend each month. Break down your expenses according to whether they are recurring, or one-time. Don’t forget to include your spending on every day items, or splurges. You want to have a general idea of how much you spend each month. This is the foundation of your budget.
Prioritize your expenses as well. You want to make sure that the most important expenditures you have are covered first. Bills, groceries, and debt payments are among the most important spending categories. When you prioritize your expenses, you have a solid idea of which things can be dropped from the list if you have a lean month. Know ahead of time what you can cut back on if necessary.
Know Your Income Sources
You also need to know where the money is coming from. Do you have multiple jobs? If you are self-employed, what percentage of your income is from a specific source? Document your income so that you have an idea of what you earn.
If possible, look at what you made in the last 12 months. Divide that amount by 12. This is a great way to estimate your average monthly income. If you made $45,000 over the last 12 months, your average is $3,750 a month. With a variable income, though, you might earn $4,500 on month, and $3,200 another month. The average, though, gives you a solid place to start.
Keep Your Monthly Expenses in Line with Your Monthly Average
Once you have your monthly average, base your spending plan or budget on that income. Look at your expenses, and cut out the least important items so that your spending is in line with your monthly average. Plan your retirement contributions, fun purchases, debt repayment, and other spending so that you can live within your means on your average income.
Every six months, re-evaluate your average income. You want to make sure that it is still fairly accurate. If your average income is dropping, you’ll want to cut more lower priority spending from your budget. If your average is on the rise, you can adjust your spending plan so that more money is going toward retirement planning, or debt pay down.
Prepare for the Future
The key with budgeting on a variable income is preparing for the future. Once you have your average, you can plan around that. On good months when you earn more than the monthly average, you can put the difference away in a special high yield savings account. In our example above, if you have a good month that earns you $4,500, you would put the difference between your earnings and the monthly average in an account. That means you would put $750 aside. Each month that yields more than your 12 month average should provide you with a way to build up a bit of a cushion to help you through the lean months.
On months that you don’t earn as much as your average, the best first step is to attempt to cut back a little bit. See if you can avoid some of your more frivolous spending. Then, once you have made that effort, you can dip into your cushion to supply any deficiency.
When your income changes from month to month, it is important that you consider your options, and pay attention. Be aware of where your money is coming from, and where it is going. Build up a cushion so that on down months you aren’t racking up debt.
Miranda Marquit is a professional freelance writer who specializes in personal finance topics and runs PlantingMoneySeeds.com. She lives in Logan, Utah.
Image credit: auremar