How to Make a Budget When Your Income Varies

Making a budget is difficult in the best of circumstances, but if you have a variable income, it can seem nearly impossible. If you are self-employed, work for commission or are in a seasonal profession, like farming or tourism, your income can change significantly from month to month. Many of your monthly expenses, however, stay the same, and you must pay those bills regardless of how much money you made that month.

In order to make a budget when your income varies, you need to find your average monthly income. I recommend using a spreadsheet program for calculating your average income and tracking your expenses because it is easy to use and simplifies all of the calculations.

Finding Your Average Income Using Your Tax Return

If you have been working in your profession for a full year, you can simply look at your income tax return to find the total amount of money you made during the year. Divide this number by 12 to find the average amount of money you made each month. If you have been in the same profession for many years, even better. Find out what your average monthly income was for each year and compare them to see if your average is increasing or decreasing.

Finding your Average Income Using Your Monthly Income

If you have only been working in your field for a few months, add up your income for the months that you have been working and divide by the number of months. For example, if you have been working for 6 months, add up your income and divide by 6. Each month, calculate a new average that includes your most recent monthly income. You can use the spreadsheet to keep track of your actual monthly income and your average monthly income on a month-to-month basis.

The Accuracy of Your Average Monthly Income

Keep in mind that the fewer months you include in your average income, the less accurate this number will be. Your variable income can be affected by many different factors, and you need a full year or more to really see how your income changes by the month and season. At first, your average income will fluctuate quite a bit each month when you factor in your current month’s income, but over time, this number will stabilize and you will have a good idea of what your average income actually is.

Keeping track of your expenses is a vital part of any budget, whether your income is variable or fixed. Write down how much you spend each month on all of your various expenses like mortgage, rent, utilities, insurance, food, gas and entertainment. Car payments and other fixed expenses are easy to determine, but variable expenses, like food and gas are harder to estimate. At first, just make an educated guess about how much you spend on each category. Then, start keeping track of all of your purchases and adjust your estimates if necessary.

Prioritizing Your Expenses When Your Income Fluctuates

Once you have made a list of expenses, prioritize them according to how essential they are. For example, your mortgage payment, insurance, utilities and food would be at the top of the list, while new clothing and entertainment would be at the bottom. Also include things like contributions to your savings accounts, college fund or retirement.

Draw a line through your list of expenses at the point where they change from being absolutely necessary to optional. The expenses above this line are essential, and you want to make sure you will have enough money to cover them each month. The expenses below the line are ones that you can cut out or reduce if you are experiencing a particularly lean month.

When you have a fixed income, all you have to do is make sure your expenses are less than the amount you make every month. When you have a variable income, however, this basic comparison is not enough. You need to make sure you will have enough money to cover all of your expenses in both the lean and plentiful months.

Keep Your Expenses Less Than Your Average Monthly Income

Find the lowest amount of income you made in one month and use that as the base. If your expenses are less than that amount, you are in fantastic financial shape and should be able to pay your bills easily every month. If your expenses are between your lowest income and your average monthly income, you are still in good shape, but you will have to plan your budget carefully to make sure you have enough money to cover your expenses during the lean months. If your expenses are more than your average income, you need to reduce them so that they are less than the average or you are likely to come up short.

Make Sure Your Lowest Income Can Cover Your Necessary Expenses

Now compare your lowest income amount with your necessary expenses—the ones above the line. Ideally, when you add up all of your necessary expenses, the total should be less than your lowest income. In the worst case scenario, you want to make sure you will be able to cover all of your basic needs without pulling from savings. If your necessary expenses are significantly higher than your lowest income, you could be in serious financial trouble If your income is low for several months. You need to find a way to reduce or reprioritize your necessary expenses or increase your income.

Following a budget when you have a variable income requires planning and careful allocation of your money. Set up one checking and two savings accounts to manage your money. The checking account will hold the money for your current month’s expenses, the first savings account will be for the income that you make during the month and the second savings account will hold your long term savings.

Use Savings to Compensate for Your Variable Income

You should keep enough money in the first savings account to cover all of your expenses for 3-6 months. The more dramatically your income varies each month, the more money you need to have in your savings account. If you are just starting out with your budget, you probably don’t have this much money in your savings account yet. Cut back on your expenses as much as possible and make funding this savings account a priority until you have built up enough savings. This account acts as a buffer so that you don’t feel the pinch when times are lean.

Pay Yourself a Fixed Amount Every Month

At the beginning of the month, transfer enough money to cover your expenses out of your first savings account into your checking account. When a bill comes due, pay it with the money from your checking account. You should have already included contributions to long term savings, retirement and college in your budget, so go ahead and deposit these funds in the appropriate account. If you stick with your budget, you should never have to pull any more money out of your first savings account during the month. If you find that you frequently transfer additional money in, then you are either not budgeting enough or are spending too much. Make sure that you never transfer more than your average monthly income in one month or you will risk depleting your savings account.

Use Your Income to Replenish Your Savings

Whenever you get any income, deposit it into the first savings account to replenish the money that you took out. Your income may vary from month to month, but the average amount of money in your account will stay the same because the high months balance out the lean months. You can make lump payments to yourself at the beginning of the month just as if you had a regular salary without having to worry about the ups and downs of your monthly income. Make sure you continue to keep track of your average income and expenses so you can make sure your budget is still reasonable.

Your second savings account is for your emergency fund and long term savings. This is the account that you use to save up for things that are not part of your regular monthly budget like a vacation or car. You would also use this account to pay for any emergency expenses.

Make sure you are pulling money out of the correct account when you are paying for your expenses. Your first savings account should only be used to pay for your monthly expenses and your second savings account should be used to pay for irregular and emergency expenses.

Making a budget when your income varies is definitely a challenge, but it is not impossible. The key is to monitor your average income and expenses carefully, and to make sure you have a reserve built up in your savings account. By doing this, you won’t have to worry about how much your income fluctuates because the highs and lows will average out.