My income varies with each passing month. Sometimes there is a $700 difference from one month to the next, and so I had to quickly build a smart budget to overcome the volatility. Here’s what I’ve learned about budgeting on a variable income!
Variable Income Budgeting: Why?
If you’re self employed, you’re probably in the same boat. Building a budget that can withstand an income roller coaster ride can be difficult, but it’s necessary.
Variable income budgeting is useful for those who cannot predict what their income will be month to month. It’s helpful because when you come up short, you don’t have to worry about which categories to fund and which ones to let go. Your budget will dictate what to fund, when you should fund it, and how much to fund it.
If you have a variable income and don’t currently use the following budgeting techniques, you might come up short on cash and make a few financial mistakes.
But no worries! Below I’ve laid out a plan to get you on the right track.
Budget the Right Way
Step 1: Determine your priorities
The very first thing you need to do is prioritize your expenses. This might seem like a daunting task, but I’ll get you started. You should have the following categories at the top of your list:
- Giving (Tithing)
- Groceries (Food)
- Utilities (Electricity, water, garbage, etc)
- Housing (Mortgage or rent payment)
You can rearrange these priorities as you see fit (except for tithing, of course), but they should always be at the top of your list.
Secondary priorities will make up the majority of your prioritized expenses. These are things that are largely negotiable and discretionary.
Step 2: Determine how much you’ll spend per month
When you’re happy with your prioritized list of expenses, now it’s time to ask yourself how you will fund these categories!
Keep in mind that you should always spend less than you make. After all, you want to get yourself out of debt, right? It’s helpful to look at your average income verses your lowest income month from the past year. Build your budget on a “worst case scenario” basis. Don’t spend much more than that “worst case scenario” would have you spend month to month.
For example, let’s say you normally make $3,500 per month. But in the past year you’ve had a month that dipped down to $2,500. Build your budget based on an income of $2,500 to $2,700 per month. You get the idea! Any extra money is gravy which you can throw toward one of your 7 Baby Steps if you’re on Dave Ramsey’s plan.
If you’re just starting out budgeting, it can be difficult to find the right balance between how much you spend in each of the categories. No worries! Simply do your research and come up with figures that are as close to reality as possible, and adjust as you go. Eventually, you’ll find out how much you should fund your categories.
Step 3: Stick to your budgeting procedures
Matt Bell wrote a great article on how to stick to your budget. I suggest you check it out! But here are a few of my own tips for sticking to your budget:
- Record transactions daily. If you’re using the envelope budgeting technique, you’ll need to track your receipts in your budgeting program. Don’t let these get behind, trust me, it’s no fun going through several week’s worth of receipts! Looking at your budget daily will help you stick to it.
- Reconcile transactions at least once a week. For those transactions you’ve recorded, check them at least once a week with what you actually have in your bank account or budgeting envelopes. Make sure there are no errors, and report any errors to your bank immediately!
- Don’t get discouraged by under-budgeting. If you need to spend more money in one category than originally expected, that’s okay! Just make sure to pull some money from another category to compensate. We have a “Hill and Valley Fund“ that allows us to budget with a bit more flexibility.
Three easy steps. See? Budgeting on a variable income isn’t as bad as you thought it was, right?
Meet us in the comments and let’s discuss some ways you budget your variable income!