Budgeting on a Variable Income: Get it Right!

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)
  • Clothing
  • Transportation

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.

By the way, if you want to start a variable income budget and need to brainstorm some categories, priorities, and more, check out the Budget Category Brainstormer – a printable worksheet with over 80 budget categories!

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!

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  1. sokun

    Great post, fortunately i don’t have that variable an income but i soon feel i’m going to need this info because i’m expecting my income to rise and become volatile

  2. Briana @ 20 and Engaged

    I definitely need to do this. I admit, I’ve been procrastinating on making my new budget, and of course, my finances have probably suffered from it. I will definitely sit down and make it happen this weekend.

  3. [email protected]

    John, I am a bit puzzled why you would say that Tithing needs to be at the top of your list. That really is a personal decision based on what you believe and how to manage your money and not really a bare necessity item like food or the heating bill.

    I completely respect if you feel that is important to you but from a budgeting standpoint it is entirely optional and personal.

  4. Fee

    @Luis, Malachi 3:10 tells us that it (giving to God) should be 1st in our lives. Not only are we following a wise teaching of God, but it teaches us that we are not the center of the world. Giving to God should be first because where you treasures are, so is your heart.

  5. [email protected]

    Well, I don’t want to go off on a biblical discussion here but I am sure you are aware that there are hundreds of things in the bible that cannot and should not be taken literally…

    I am just going of a common sense budgeting approach if you are on a variable income.

    If you are trying to deal with your bills and set up your true necessities so that you can figure out what are the priorities if you are in a variable income then the tithe is not really a priority unless it is one for you. Which is fine but you should not say that it “should be at the top of your list” when it really doesn’t.