THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY DISCLOSURES. FOR MORE INFORMATION.
Using a budget to plan your spending is the best way to not only achieve financial freedom, but it’s also improve your financial situation.
But things get tricky when you have a variable income.
In this post, I walk you through how to budget with a variable income so you can meet your current financial needs and work towards reaching your future money goals as well.
Table of Contents
How To Budget With A Variable Income
The Issues With An Variable Income Budget
Most budgeting advice is typically geared towards those who have an regular paycheck.
When you work a regular 9-to-5, you know exactly how much money is going to be coming in with each paycheck.
This makes building a monthly budget easier because since you have a steady income coming in, you just have to work with your monthly expenses to match this income.
But when your income varies along with your expense, things get more complicated.
Now you have to be more flexible when building your budget so you have enough money to pay your bills as well as your discretionary expenses and savings contributions.
The good news is that if you have income changes from month to month, it doesn’t mean you cannot set up a budget.
Below, I detail step-by-step advice to help you get the most out of your budget.
Step #1. Calculate A Monthly Average Based On Past Income
The first step to learning how to budget with irregular income begins with understanding how much you typically have coming in and basing your income category on an average of that income.
The best way to do this is to go back into your transactions and get anywhere from 6 to 12 months of consecutive earning data.
Then add it all together and divide it by the number of months.
When you have that, you have your average.
For example, if you look back to the previous year and see you have a total income of $50,000 then you would divide this amount by 12 to get an average monthly income of $4,167.
It’s important to note that some people may actually have steadier incomes despite working jobs where irregular income is present.
For example, if you earn anywhere between $3,000 to $5,000 most months, you may be able to set your income expectations at around $4,000 based just on your earnings across several months.
- Read now: Find out how much $10 dollars an hour is annually
- Read now: Learn what $20 dollars an hour is annually
This average can also act as your income goal for the month so that you can properly look for and plan out your work or gigs accordingly until you reach or exceed that goal.
One final note on coming up with an average income.
When you are looking through your previous year’s worth of income, take note the amounts and if there is a wide variance.
For example, you might find that for most of the year, your income in within a range but then in December, you get a large year end bonus.
This bonus can skew the numbers and make budgeting that much more difficult for you.
For example, let’s say your monthly income is as follows:
- January: $3,800
- February: $4,200
- March: $4,500
- April: $4,000
- May: $4,800
- June: $3,700
- July: $4,200
- August: $4,000
- September: $5,000
- October: $4,700
- November: $4,500
- December: $4,200
In this example, your average monthly income is $4,300.
Now let’s say you get a $10,000 bonus in December.
This causes your average monthly income to be $5,133.
If you use this number as your base to budget, it is going to be hard to budget for your expenses most of the year.
As a result, you might want to omit high earning months so to not run into the issue where you have a lot more expenses than monthly coming in.
However, don’t exclude your lowest months income. This will keep your income projections conservative and make budgeting easier.
You might even find that you have extra cash come month end that you can use for living expenses, additional payments towards debt, or savings goals.
Step #2. Come Up With A List Of Your Expenses
Knowing how much you have to pay for your major expenses and other essentials is the first half of creating any budget.
The second major aspect of this process is coming up with an accurate list of expenses that will be deducted from your monthly income.
The most important thing when it comes to making a budget with variable income, however, is prioritizing your costs.
Because you don’t know when you’ll have a bad month when you don’t meet your income goals, you must pay the most critical expenses first.
For example, when you first get money coming in, you’ll most likely want to direct those funds to rent, utility bills, car payments, groceries, and debt repayment like student loans, and credit card debt.
- Read now: Click here to learn how to cut your monthly bills
- Read now: Find out over 100 ways to save money
- Read now: Learn how to save money on groceries
Next, you direct remaining money to your non-essential expenses, like dining out, entertainment, gym memberships, etc.
Then you can figure out what you want to do with the rest of your income, whether that means putting it in savings, putting it into an investment, or spending it on yourself.
Learning how to budget with variable income means taking care of your most important expenses first and figuring out how to deal with the rest should you earn less in a month than you normally do.
Finally, much like there’s irregular income, you also have irregular expenses.
Categories like water or electric will rarely be consistent every month.
With variable expenses, regardless if you have a steady income or not, do the same thing that you did with your income to come up with an average payment for each month.
If you go a little bit over, it shouldn’t be by too much.
However, it’s important to keep this in mind for the future in the event that one of your bills does skyrocket and you end up allocating more of your funds to that category before you’re able to pay off others.
Step #3. Make It A Priority To Some Money In An Emergency Fund
One of the most important steps to take when you live on an inconsistent income is to have an emergency fund that you can tap into when unexpected expenses come up.
Whether you’re a gig economy worker or a freelancer, there’s no guarantee that there’s always going to be work or that you’re going to be in a position where you’re actively working.
When there’s a total loss of income, having savings to fall back on means the difference between being able to pay your bills and potentially losing things that you must have to lead a safe, healthy life.
Generally, the advice regarding emergency funds is to have at least 3 to 6 month’s worth of expenses tucked away for a rainy day.
However, as someone with variable income, you may want to have more.
This is especially true if you work in an industry where you heavily invest in your own materials to offer your services and would have to pay a significant amount of money should an accident take place.
With this money set on the side, you can actively contribute to it monthly and take from it if you fall below your income goals for the month and absolutely need to.
Step #4. Put Money In Different Bank Accounts
Many people, regardless of their income, keep the majority of their money in their checking account.
This is a problem because they never actively save any money.
Instead, you should keep enough money in your checking account to cover your monthly bills and then move the rest into another account.
- Read now: How much money you should keep in your checking account
- Read now: Learn the pros and cons of multiple bank accounts
This is especially true if you have an unsteady income.
Determine your budget and if you have a good month, move the extra income into a separate savings account or a second checking account.
Keep this extra money here until next month or a month where you need to cover some basic expenses.
Step #5. Look For Ways To Supplement Your Current Income
Using this budgeting tool isn’t just about planning out your finances, it’s about making plans to make sure that every category of expenses are being met.
The last thing that you want to do is dip into your savings on a monthly basis until you’ve exhausted all the money that you put aside.
Instead, taking initiative and looking for ways to support your income now and in the future will be very beneficial to your finances.
Whether you’re looking for a part-time job, another side hustle that you can easily squeeze into your schedule, or small tasks like taking surveys, come up with a list of additional resources that you can tap into if need be.
You may even wish to start looking into investment vehicles that can help you develop passive income so that you don’t have to work as much for the income you currently make.
If you have extra time to tackle all of these, you can even earn a little more per month that you can spend as you like, build savings, or pay off debt.
Step #6. Consistently Work Toward The Future
If there’s one thing that seems to be common for those living on a variable income, it is that the present often demands the most of your time and resources.
While this is true for everyone, those who have inconsistent income may not be focusing at all on their financial future.
If this goes on for years or decades at a time, all your hard work will be for naught if you’re unable to retire comfortably with plenty of money stashed away or even hit some of your major life goals in the process.
If you want to budget with irregular income while also thinking about the future, you should consider focusing on the following tasks.
Saving Money With Irregular Income
Set Specific Savings And Investing Goals
So far, we’ve talked about the importance of developing an emergency fund.
However, short-term savings goals aren’t the only focus you should have.
Mid to long-term savings goals like home ownership or family vacations should also be on your radar.
- Read now: Learn the pros and cons of sinking funds
More long-term goals like retirement are also important to begin focusing on as soon as possible.
Set aside some time to come up with some specific savings and investing goals that you can act on.
Make Sure You’re Always Contributing To Those Targets
When you have a variable income, the majority of your income will be going to your most essential expenses.
However, you should have some leftover money when all has been settled.
Make sure that you’re using some of this money to contribute to your goals formulated above.
- Read now: Learn the simplest way to become rich
Even if it isn’t a massive amount of money, something is always better than nothing!
Put A Greater Emphasis On Financial Freedom
Business and life often incur debt, whether it comes in the form of a college degree, a new vehicle for the gig economy, or even a mortgage.
The issue with debt is that you can’t start truly building wealth and getting ahead until you’re out of the red.
Come up with a debt repayment plan so that you can wipe these obligations out of your budget and save every dollar that you have to build more wealth later on.
- Read now: Learn how to use the debt snowball to eliminate debt
- Read now: Discover the joys of debt free living
It’s a lot of work, but it will feel worth it when you’re no longer spending your hard-earned cash on regular payments to pay off property or the heavy interest payments that come tacked to your debt.
Consider Ways To Reduce Your Work And Increase Your Earnings
If you have a sole proprietorship or your own business, the goal is to work less while earning more.
Sometimes, this may mean scaling your business.
In other instances, people can achieve this by investing money in lucrative industries like the real estate industry.
Don’t just focus on earning a certain amount each month and calling it even.
Come up with some ways you can start earning the income you want without having to put so much work in to make it.
Then, simply reinvest that money, earn more, and build the future that you’ve dreamt of.
Using A Budget With A Variable Income
Even though don’t have a steady income, you can still use the basic framework of the zero-sum budget or even the 50/30/20 rule.
- Read now: See the zero base budget in action
- Read now: Learn more about the 50/30/20 budget
You just have to be more flexible with it since your income varies monthly.
But using the tips in this post, you should be able to create a budget that works for you.
Budgeting with a variable income is possible.
It involves a little more work than working with a normal budget when you have a steady income, but it is doable.
By following the steps laid out above, you can not only plan for your current expenses, but also start working to reach your financial goals so you can achieve your dreams.
- Read now: Discover 75 powerful budgeting quotes to inspire you
- Read now: Here are the 17 good money habits you need to possess
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.