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6 Steps to Help You Budget with Variable Income

Are you self-employed, paid on commission, or dealing with unpredictable income? No matter why you can't count on a regular paycheck, it is possible to create a money system that works. Money Girl cover strategies and steps to budget and smooth out your finances.

By
Laura Adams, MBA
Episode #602
6 Steps to Budget with Variable, Irregular, or Unpredictable Income

One benefit of being a 9-5 employee is getting a steady paycheck. Knowing how much income you’ll have in the bank every month makes it much easier to budget, save, and have a smooth financial life.

But what if you don’t have a regular job or your position comes with unpredictable income? Many people are self-employed or work on commission and have no clue how much they’ll earn from month to month.

For instance, solopreneurs and small business owners may not know exactly how much revenue they’ll bill or the total amount of receivables they’ll collect. Salespeople can have rollercoaster commissions that fluctuate wildly from month to month or quarter to quarter.

No matter why you may be dealing with uncertain income, it is possible to create a money system that works. In this post, I’ll cover strategies and steps to budget and manage money the best way possible when you have variable, irregular, or unpredictable income.

6 Steps to Budget with Variable, Irregular, or Unpredictable Income

  1. Have a vision for your financial future
  2. Know your spending baseline
  3. Add your financial goals
  4. Identify your discretionary expenses
  5. Create an ultra-conservative budget
  6. Set up a holding account

Here's the detail to follow for each of these steps.

1. Have a vision for your financial future.

No matter what you call your money system, such as a budget or a spending plan, it should be based on what you want to achieve with your money. Your income allows you to pay living expenses, but don’t forget that it also must fund your long-term dreams and create financial security.

No matter if you want to retire a multi-millionaire, buy a beach house, or be debt-free before a certain birthday, incorporate it into your money system. Time passes quickly, so if you’re not making steady progress toward your goals, they aren’t likely to happen.

To get started, download the free Financial Planning Workbook (PDF) and set aside at least 30 minutes to complete it. If you have a spouse or partner who shares your financial life or goals, review the workbook together. It will prompt you to ask yourself important questions and to answer them as thoughtfully as possible.

If you’re not sure what your financial vision is or should be, here are some ideas to get you started:

  • Maintain a minimum of $1,000 in an emergency fund
  • Contribute enough to a workplace retirement account to max out any matching funds
  • Save at least 10% of my income for retirement
  • Max out an IRA every year
  • Open and max out an HSA
  • Pay off a high-interest debt

If you add dates for when you want to achieve each goal it will help guide your budget. For instance, if you want to have at least $1,000 in emergency savings within the next year, you could save $85 per month for a total of $1,020. Maxing out an IRA for 2019 means contributing $6,000 or $500 per month.

When you don’t have a steady income, reaching financial goals is more challenging, but not impossible. Keep reading for step-by-step advice to create a money system that makes it easier to pay your bills and fund your goals.

2. Know your spending baseline.

Before you can create a budget with variable income, you need to know your spending baseline. This is the minimum amount of living expenses you must cover each month. These are the bare essentials, such as housing, utilities, food, insurance, transportation, and debt payments.

You might jot down these expenses on paper, enter them in a computer spreadsheet, or categorizing them in a personal finance program, such as Mint or Quicken. Since some costs aren’t precisely the same every month, you’ll need to estimate them. These might include your groceries, utility bills, or minimum credit card payments.

Spending money on hobbies isn’t a necessity but paying your rent is. Your baseline is what you need to survive, not to be comfortable.

If you have several months of spending data, that makes it easy to calculate a monthly average and see all your recurring expenses. If you have expenses that you pay quarterly or semi-annually, such as auto insurance or a gym membership, break them down into monthly amounts.

Even though reviewing your essential expenses is how you figure your budget baseline, it’s also an excellent way to know where you may be overspending and need to cut back. Reconsider what’s truly a necessity and what you can live without.

For instance, expensive dining out isn’t a necessity, but buying affordable groceries is. Spending money on hobbies isn’t a necessity but paying your rent is. You get the idea. Your baseline is what you need to survive, not to be comfortable. Figuring this amount is the first step to creating a budget and financial plan when you have unpredictable income.

3. Add your financial goals.

Once you know the minimum amount of income you need to cover your essential bills, the next step is to add in your financial goals. While these aren’t necessary for short-term survival, they are critical for your long-term security and happiness, so they can’t be forgotten.

When you don’t have a steady income, it’s even more critical to allocate monthly amounts to your goals, such as building an emergency fund, saving for retirement, and taking a vacation.

When you don’t have a steady income, it’s even more critical to allocate monthly amounts to your goals, such as building an emergency fund, saving for retirement, and taking a vacation. If you don’t, it’s easy to fritter away extra money and never get ahead financially.

Sticking to positive financial habits, even when you don’t have much to spend, moves the needle on progress. If you wait until you have a windfall before you begin saving for the future, you’ll be unprepared when the future arrives. So, don’t let your future self be broke and unhappy!

Add at least one of your monthly financial goals to your paper or spreadsheet plan. If you use a personal finance app or software, most have a budgeting feature for allocating spending limits to different categories.

Your living expenses plus the cost to fund reasonable goals is the actual amount you need to cover each month. At a minimum, I recommend saving 5% of your estimated income for emergencies and investing and additional 10% for retirement. Consider these savings amounts as “expenses” that you owe yourself every month.

If you’re self-employed, don’t forget to include taxes in your baseline expenses. In general, you must pay estimated quarterly taxes throughout the year. If you’re not sure how much you’ll earn, you can estimate based on what you made last year. A good rule of thumb is to set aside 25% to 30% of your self-employment income for taxes.

4. Identify your discretionary expenses.

Once you’ve identified all your baseline living expenses, including goals and self-employment taxes, everything else you spend money on is a discretionary expense. I know it may feel like you can’t live without cable TV or dining out, but these are not critical for your short- or long-term survival.

Remember that you can’t change what you don’t measure. The idea isn’t to wallow in what’s going wrong with your finances, but to use the data and information you gather to make positive changes.

If you’re struggling to save money or to pay off credit cards, one solution is to reduce or eliminate a variety of discretionary expenses. Don’t get me wrong, reducing substantial baseline costs, such as housing and vehicles, is worthwhile, but cutting those may be more difficult.

Remember that you can’t change what you don’t measure. The idea isn’t to wallow in what’s going wrong with your finances, but to use the data and information you gather to make positive changes. This is how to get your financial life on track whether your paycheck is consistent or not.

5. Create an ultra-conservative budget.

Now that you’ve done a thorough review of your expenses, turn your attention to earnings. Go back to the previous year and identify the three months with your lowest earnings and take the average.

For example, if your lowest three months of income gave you $3,000, $4,000, and $5,000, add them up and divide by three months for an average of $4,000. If your total expenses exceed that amount, it’s time to radically cut your living expenses, discretionary expenses, or a combination of both. It’s your job to make sure that you create a solid plan never to spend more than your low-end average income.

Budgeting with the low end of variable income doesn’t guarantee that you won’t earn less and have some challenging months. But it does reduce the likelihood that you’ll come up short. And when you make more than your low range, you’ll have a financial cushion—more about that in the next step.

6. Set up a holding account.

The secret weapon to manage money wisely and stick to a budget when you have variable income is to use a holding account. This account is where all your income should go until you transfer it to another account. It’s a secondary checking account that you link to other accounts, such as your primary checking, savings, and a retirement account.

The way to smooth out your finances when you have irregular income is to pay yourself a set amount regularly from your holding account.

The way to smooth out your finances when you have irregular income is to pay yourself a set amount regularly from your holding account. You might choose to transfer one payment on the first of the month, or half on the first and the fifteenth.

The key is to transfer no more than your low-end average income into your primary checking account. From there you pay all expenses, including your savings goals, according to the budget you designed.

Using my previous income example, let’s say you make $5,000 and put it into your holding account. You would only transfer $4,000, your low-end income, into your checking. The leftover $1,000 stays in the holding account as a cushion that you never tap, unless your income dips below $4,000.

Make a goal to build up two months of your high-end average income as a reserve. For instance, if the average of your three highest-earning months from the previous year is $6,000, be vigilant about slowly building up your holding account to $12,000.

This strategy will allow you to pay yourself a consistent amount every month instead of struggling with variable income. You allow the good months to balance out the bad ones. Plus, you’ll slowly accumulate a nice surplus over time.

Will it be easy? Probably not. You’ll need to tweak your spending until the amount you pay yourself covers your living expenses, savings goals, and discretionary spending.

If you struggle with building up cash in your holding account, you may need to get a second job or do seasonal work until you get ahead financially. Don’t fall back on racking up credit cards while you get your money system in place. With the steps that I’ve outlined, you can continue chipping away at debt as you go.

No matter what goals and dreams you set your sights on, getting tough with yourself can be as easy as creating a consistent money system. Focus on doing the most important things first and sticking to good habits, no matter how small the accomplishment. Any sacrifices you need to make will be worth it in the end when you take control of your cash flow, build wealth, and turn your financial goals into reality.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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