Creating a budget when you live on a variable income creates a unique set of challenges. Budgeting expert, Nathan Lippincott shares options for making a budget work, even if your income is not consistent.
Many careers or jobs are paid on a variable income. Perhaps you own your own business, or maybe you are a realtor or some other kind of sales job, where salary is commission-based and changes on a regular basis. This can make it extremely difficult to create a budget and many people despair of being able to do so. Today’s blog will provide insight on how this is possible.
Give Yourself a Regular Salary
I believe the easiest and smartest way to start a budget on a variable income is to pay yourself a regular salary. Begin by opening a separate checking account so you can deposit money into that account and then give yourself “paychecks.” This account is a business account and it is used only to draw your own salary.
Any time you receive a business-related income, put it into your new business account. In order to determine how much to pay yourself, you need to have a general idea of what you make in an average month. A good way to determine this is to add up your income from the last 12 months and then divide by 12. This will provide you with a rough estimate of how much to pay yourself each month from your business account.
If you find that any particular month you have made more than expected, leave this money alone in your account. It will provide a cushion for the months when you may not make enough to cover your established monthly salary. If you have several good months in a row, then transfer some of the extra income into retirement savings, or put it towards a big purchase or some extra spending, if desired.
The benefit to this approach is that you can then create a budget from the salary that you have. You will also automatically have some extra money in your business account on some months, rather than immediately spending it when it comes in. This extra can become your emergency fund or be added to your retirement. The only drawback to this system is that it may take a few months to build your cushion, which means that if you have a rough month in the beginning, where your income is lower than expected, you may have some difficulty covering your self-paid salary for that month.
Create a Priority List
Another approach for budgeting on a variable income is to utilize a priority list. With a prioritized spending plan, at the beginning of each month, you compile a list of bills and expenses from most important to least important. The key here (especially if you are behind on payments or struggling financially) is to know what is really most important.
The ones at the top of the list need to be things that keep your family secure and well fed, so the priority list should be food, essential utilities, mortgage or rent, transportation. After that, you will need to list other set expenditures, such as health insurance, credit card payments, student loan payments, etc. At the end of the list will be the things that you want but do not necessarily need: savings, cable subscription, gym membership, dinners out, etc.
In a good month, you will get to all the essentials and non-essentials and still have some money left over to save for a bad month or else to put towards short or long term savings. During a bad month, you may have to do without a few non-essentials to make ends meet. This can be a more stressful way to deal with variable income, but if your salary varies by hundreds or even thousands of dollars a month, it may be the best way to get started.
Live on Last Month's Income
The final option for working with a variable income budget is to live on last month’s income. This approach builds in the most “breathing room,” but is the hardest to set up in the beginning. Popularized by You Need a Budget, living on last month’s income is a solid option. YNAB recommend this option for everyone, even people on a fixed income, but it’s most helpful if you don’t know what you will be making from month to month.
To get started with this budgeting technique, you’ll save up one month’s worth of expenses. Not sure how much money that is? Look through your spending for the last few months, and add up what you have to spend to pay for one month’s essentials. Once you determine your monthly expense amount, then you save it as quickly as possible. For example, if you need $4,000 to pay all your bills each month, you will need to save that amount in order to begin working your budget. As soon as you reach that amount, you can use that for your monthly expenses and save the current monthly income for next.
This actually can turn into a fun kind of “game,” where you always try to make more money than you did last month while maintaining the same expenditure amount. If your budget is $4,000 a month, then you can begin to try to make $4500, then $5000 and so on. Always try to make more than you did last month and see how far this method can take you!
All of these options are incredible. They all work very well. You may find that a combination of all three ideas works best for you. You may have a spouse that also works and a makes a salary so you can play around more and find out what works best for your circumstances. The most important thing to remember about money is to DO SOMETHING. Keep track of your finances in some way. If you do not do this, you will always, always, always spend more than you make. You must take control of your money or it will take control of you.