If your income varies, you know how great it feels when you make a lot, along with how stressful the lean times can be. Whether you work on commission; are a freelancer, contractor or gig worker; or your work schedule is unpredictable, you can’t always manage the size of your paycheck while the bills keep coming. Budgets are important for everyone, but they’re even more important to help you manage the ups and downs of irregular income.
When you put together a budget, the most important step is to put together something that works for you, whether that’s an app, Excel spreadsheet, or piece of notebook paper. The order of the following steps isn’t set in stone, but it’s important to do all of them.
There are two ways to approach your income. You can work with your lowest possible monthly income OR use a monthly average. (To determine a monthly average, total your bring-home pay over the past few months, divide that amount by the number of months and you have your average monthly income.) Using the average is safer if you have an emergency fund or your income doesn’t vary greatly.
It’s important to be realistic with your income amount – no one wants to be in the hole every month because their budgeted income is too high.
Start with the essentials – things you really can’t live without like your rent/mortgage payment, utilities, insurance, medicine, etc. These are items that can’t easily be eliminated. This is your baseline budget and reflects the absolute minimum you need to earn.
Now add on the extras – cable, cell phone plan, entertainment. Try to be as honest and realistic as possible. A budget isn’t a punishment – while you should try to be frugal with your expenses, don’t set yourself up for failure from the beginning. When considering your expenses, don't forget bills that aren't paid monthly like property taxes or insurance payments.
An especially important category to include as an expense is savings. While everyone needs to include savings in their budget, it’s absolutely necessary for those with variable income. At the least you need to have a “slush fund” savings account to cover low income months and emergency expenses. Ideally, you’re including multiple savings accounts, like retirement, mortgage down payment, vacation, etc. (If you’re not including these at the beginning, don’t get discouraged. Being able to save for the future without going into debt is the point of a budget.)
As you work on your budget, some ugly truths can come to light. A few examples:
It’s important to keep track of how accurate your budget is, especially in the beginning. If you’ve overestimated your income, or underestimated your expenses, make corrections. Your short-term goal is to get as much as possible in your slush fund account. Making those “payments” is just as important as every other bill you have, because this is the money you’ll use to cover unexpected expenses or a low income month.
If you monitor and adjust your budget, it will become more accurate over time even with a flexible income. Ideally, your expenses will remain fairly consistent, or even go down if you’re paying off debt. Seeing the amount you can save each month increase is the ultimate pay off of budgeting.
The bottom line is that while it might be a bit more challenging to budget based on variable income, it really does pay off in the end.
The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.