How to Budget With Variable Income Fluctuations
Let’s be honest. Budgeting always seems tough - especially before we begin. No matter how often we’ve kicked ourselves for overlooking an upcoming bill or wished we’d done a better job managing that brief surplus, we tell ourselves that NEXT month we’ll be fine. And sometimes we are… for a month or two. Then, we end up short when bills are due or living on ramen noodles and off-brand cereal for a week, hoping our next check covers both electricity and real food.
When our income varies from paycheck to paycheck, or when it arrives at irregular intervals, it can seem even harder to maintain a meaningful budget. In reality, however, that’s when it’s most important to be strategic about our resources. Believe it or not, you can learn how to budget with a variable income just as easily as you can for more traditional financial situations. The hardest part is sitting down and getting started. Once you’ve done that, you’re on your way.
How To Budget With Variable Income
Let’s talk about some of the strategies specific to freelancers, those who work largely on commission, or any other situation where your income varies substantially from week to week or month to month.
✔ Start with Your Slow Months
Don’t base your budget on what you hope will happen, or on your most recent months. Look back over the past year and choose your slowest month or at least a period in which things were on the thin side. Start your budgeting numbers there, especially until you have some reserves built up.
Even when we’re not living on a variable income, one of the most common budgeting errors is what some experts call “aspirational” decision-making. Humans are quite skilled at telling ourselves whatever we need to believe in order to feel good about what we’ve decided to do anyway. Folks with variable incomes tend to be self-employed or work in sales or the arts - all situations requiring a great deal of personal faith and over-the-top optimism to succeed.
That sort of hopeful thinking can be quite powerful when it comes to selling your manuscript or closing that deal, but it’s poorly suited to budgets. If you end up way ahead of what you anticipate financially, it’s easy enough to adjust. Start by assuming it might take a while and plan from there.
✔ Don’t Just Be Self-Employed; Be A Self-Employer
Begin by setting up a separate saving account for your income. Don’t deposit directly into the account you use to pay bills or the one from which your debit card draws. Just because you don’t have a predictable monthly income doesn’t mean you can’t duplicate the experience by “paying yourself” a regular salary. This allows you to budget more predictably and makes it easier to utilize modern technology to support your efforts with far less time and headache than may have been required a generation ago. (We’ll come back to the wonders of modern technology in a moment.)
You want to build up a sufficient surplus over time to allow you to maintain your monthly “income” even during slow months. I know, I know - this sounds impossible for many of us when we first get started. If we had a surplus each month, we wouldn’t even need a budget! (That’s not actually true, but we’ve all thought it as we scramble for reasons not to do what we know we should do).
Reduce Your Income by 10%
If you don’t believe you have enough surplus for some months to build up a reliable cushion, try making a copy of your budget with your total income reduced by 10%. Tighten your belt and live on 90% of your income for six months or a year. Guess what? Now you have a little cushion built up in your primary account to help get you through the lean months. You’ve also become much better at cutting expenses without sacrificing overall happiness. That’s a double win!
I realize it’s not always easy. The process may take several months (or longer), but it’s entirely doable with focus and determination. You’re here, reading this, so clearly, you already have more motivation and insight than most, otherwise, you’d be binge-watching Naked and Afraid or something.
✔ Pay For This Month With Last Month
This is a similar strategy to that cushion we just mentioned. Strive to get yourself to a place where you regularly pay this month’s expenses with last month’s income. This allows you to adjust your spending decisions based on the hard realities of the previous month and eliminates chance or guesswork related to this month’s successes.
Such an approach may seem ambitious, but it’s been highly touted by experts at both Forbes and Business Insider. It may take some effort to get the pattern established, but once attained, the benefits are obvious. It’s essentially the same approach as building up a good cushion, but more structured and strategic. You then adjust as necessary based on how things go each month.
✔ Treat Savings As A Regular Expense
We mentioned this above, but it’s worth repeating. It costs little or nothing to have separate accounts for separate purposes. In addition to your “deposit” account into which everything first goes and your checking account from which you pay your bills and draw your cash each month, consider establishing a “true savings” account intended to be just that - your savings.
Ideally, of course, you should maintain an emergency fund capable of sustaining you for six months or longer. If this simply isn’t practical, push yourself to keep at least two or three months worth of living expenses in an account which is easy to access in an emergency, but ONLY in an emergency. This is distinct from the account you pay into each month for insurance, taxes, or other annual or semi-annual expenses. Obviously, you should strive to have longer-term savings and investments as well. (If you’re not sure what those should look like, you can find plenty of help here on Budgetry or on our sister site Wealthry.)
Don’t think of these as “lots of different accounts to keep track of.” Think of them as folders in a file drawer, or drawers in a small storage box. They’re not there to complicate your budget but to simplify and clarify each priority in your budget.
✔ Use The Available Technology
It’s easy to forget that one of the primary purposes of technology is to make our lives easier and help us accomplish our goals more efficiently. Just because the world seems to keep getting more and more complicated (and technology is often involved in the process) doesn’t mean the problem is the tech itself. Humans have always found ways to make everything difficult - long before the first television, cell phone, or tablet.
Whether we’re talking about spreadsheets, social media, or personal financial management apps, it’s important to remember that the decisions and priorities have always been and will always be yours. No budget, no organizer, no unified finance website is going to tell you how to spend your own money or scold you for your priorities. That’s not what any of these things are for.
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General Budgeting Tips
Don’t guess if you can look it up. If you still write checks, you should have records of everything you’ve paid this way over the past year. If you pay bills or make purchases online, that information should be readily available as well.
As you realize how much you spend on certain things or how often you haven’t been making the best decisions, learn from the experience and remember the unpleasant feelings - but don’t beat yourself up after the fact. Focus on what you can control going forward, not on what you wish you’d done looking back.
Once you’ve listed your expenses, categorize them into three basic budget categories:
Essentials
Essentials are things like your car payment, utilities, groceries, etc. These amounts may vary from month to month, but they’re always there
Importants
Importants are things that matter, but we can often live without or delay until we can afford them, like new clothes, minor repairs or upgrades, etc.
Wants
Wants are the fun things that keep everything else interesting, like streaming services, eating out, etc. These matter, but we can skip them or reduce them when necessary in order to take care of the other two categories.
All three categories are valuable and worth caring for, but generally, the ESSENTIALS must be taken care of before we can enjoy the IMPORTANTS, which in turn have to be fulfilled before we worry about the WANTS.
Savings are best treated as a regular monthly expense. If you wait until you have extra money to save, you’ll never save (and you’ll rarely have extra money). Part of making a useful budget is figuring out specifically how much you can set aside each month, then “paying” into that just as consistently as you do everything else.
Don’t forget the stuff that only comes every six months or once per year - insurance, taxes, etc. One of the easiest budgeting mistakes to make is to tell ourselves that because something is 3 - 4 months away, we don’t have to worry about it right now. (Life offers enough challenges we can’t anticipate or avoid; why create additional problems for ourselves unnecessarily through denial and poor planning?)
Some of us find it difficult to include expenses like birthday presents, anniversary dinners, or holiday celebrations in our budgets. These things are fun and personal and meaningful, while finances seem cold and practical and necessary. Remember that planning ahead is an act of caring, not cold-heartedness.
Your Budget Serves You, Not Opposite
Your budget doesn’t tell you how to spend your money or determine what’s important to you. It helps clarify how you're spending your money and helps you put more of it towards the things you’ve decided are important to you. That’s an important distinction!
Don’t Do It Alone
The same traits which make successful artists, freelancers, salespersons, or other professions in which you’re likely to have a variable income tend to isolate us from others while we pursue our goals. Often, we put so much energy into wooing clients or selling ourselves professionally that we simply lack the energy to network - let alone encourage one another. In many cases, those we’d naturally turn to for support and ideas are our competition!
That’s not healthy mentally or emotionally, and it’s definitely not smart economically. Don’t be afraid to connect with others in similar situations and share your struggles and triumphs. (They need it just as much as you do, I assure you.) We believe and hope the tips and resources discussed here will do wonders for your efforts to figure out how to budget with variable income fluctuations. They’re proven strategies and reliable technology and we stand behind them.
In Conclusion
Just as importantly, we’re here to encourage you on your journey. Our blogs aren’t just about financial insights and strategies (although there are plenty of both) - they’re about people. There’s a reason our unified financial mall operates under the umbrella of Goalry instead of Dollarly or Richly or MoneyIsEverythingly. Of course the money matters, but that’s because it’s a tool which allows people - you and I - to take care of whatever truly matters to us… no matter what sort of income we have.
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