Creating a budget with a variable income requires a slightly different approach than budgeting with a steady salary, since your income fluctuates from week to week, month to month, and so on. In other words, instead of relying on a fixed income every two weeks, you are at the mercy of your sales, commissions, bonuses, tips, etc. But with some planning and research, you can create a budget that is reliable and easy to forecast. Here are some steps to help you create a budget:
1. Track Income and Expenses
Track Income: Determine the average income: Calculate the average of your income over the past 6-12 months to get a sense of your typical earnings.
Identify patterns: Look for patterns or seasons where income tends to be higher or lower. This will help you make your budget more accurate.
Track Expenses: Next is to track your expenses, both variable and fixed, and those in between.
-Fixed Expenses: List all fixed monthly expenses (rent/mortgage, utilities, insurance, etc.).
-Variable Expenses: List variable expenses (groceries, dining out, entertainment, etc.).
-Irregular Expenses: Include quarterly or annual expenses (insurance premiums, vehicle maintenance, etc.).
2. Build an Emergency Fund
An emergency fund is crucial for those with variable income. Aim to save 3-6 months’ worth of essential expenses. This fund acts as a buffer during low-income periods.
3. Create a Priority-Based Budget
Prioritize expenses as follows:
–Essential Expenses: Allocate money for essential expenses first (housing, utilities, groceries, transportation).
-Savings: Include savings as a priority (emergency fund, retirement, etc.).
-Non Essential Expenses: Budget for non-essential expenses with any remaining income.
4. Use a Conservative Income Estimate
Base your budget on a conservative estimate of your income. This way, if your income exceeds your estimate, you can allocate the surplus towards savings, debt repayment, or other goals.
5. Adjust Monthly
Reevaluate your budget at the beginning of each month based on the previous month’s actual income and expenses. Adjust categories as needed to stay on track.
6. (optional) Separate Business and Personal Finances
If you have business-related expenses (like a realtor or someone in the trades might), keep them separate from personal expenses. This helps you clearly see your personal financial situation and ensures you’re not mixing funds.
7. Automate Savings and Bills
Automate as much as possible. Set up automatic transfers to savings accounts and automated bill payments to ensure you meet your essential obligations first.
8. Plan for Taxes
If taxes aren’t withheld from your pay, set aside a portion of each paycheck for taxes. Consult with a tax professional to determine the appropriate amount. Don’t make the common mistake of spending all your income and not saving any for taxes, then having to pay back a big tax bill.
9. Use Budgeting Tools
Consider using budgeting apps like YNAB (You Need a Budget), Quicken, or others that can help you track variable income and expenses more efficiently. Better yet, just use an Excel or other spreadsheet to create and track things.
Example Budget Template:
Income:
– Conservative Monthly Estimate:** $3,000
Expenses:
– Fixed Expenses:
– Rent/Mortgage: $1,200
– Utilities: $200
– Insurance: $150
– Internet/Phone: $100
– Variable Expenses:
– Groceries: $400
– Transportation: $200
– Entertainment/Dining Out: $150
– Miscellaneous: $100
– Savings:
– Emergency Fund: $275
– Retirement: $225
– Irregular Expenses:
– Quarterly: $250 (home and auto insurance)
Total Monthly Expenses: $3,250
In months where you earn more than your conservative estimate, allocate the excess to savings or paying down debt. In lower-income months, adjust variable and non-essential expenses as needed. In 6-12 months, you will see that things are working out nicely, all thanks to the budget you created.
By following these steps, you can create a flexible budget that accommodates the ups and downs of variable income, ensuring you stay financially stable regardless of your monthly earnings.