If you are starting a new business, adding a side hustle to your routine, have a commission-based income, or are a full-time freelancer, there are different rules for budgeting and managing your finances when you don’t have a fixed income.
One of the top reasons people don’t budget on a variable income is because they don’t know how. The basic rule of “Income – Expenses” is not as straightforward in these cases. After all, how are you supposed to plan if your income is $2,000 one month and $8,000 the next? Well, this is exactly why it is even more important for those on a variable income to budget. Here are the steps needed to learn to budget and save when your paychecks aren’t predictable:
Step 1: Determine Your Baseline Expenses
The key to successful budgeting on a variable income is creating a solution to a cash flow problem. It’s not that you don’t make enough money – it’s just not coming in regular, predictable amounts. The first step to creating your budget is determining how much money you need to live comfortably every month. Remember to count everything from rent, utilities, groceries, any loan payments such as car loan, toiletries – all the stuff you need to make sure you have enough money for. It is also wise to include line items for savings and an emergency fund, both of which are especially important when your income is unpredictable.
Step 2: Calculate Discretionary Expenses
Once you’ve figured out all of your essential expenses, now is time to determine your discretionary expenses. These are things you’ll want to be sure to include every month – like cable, dining out, and hobbies – but aren’t actually essential. In other words, you could do without if you absolutely had to. These are often variable month to month and can be adjusted based on what you can comfortably afford. Take a look at your previous bank statements to get a realistic idea of what you’re currently spending and make adjustments where needed. For example, you may realize you are spending a significant portion of your paychecks on daily lattes or premium cable channels you rarely watch. Consider where you can trim back expenses on these types of luxuries. For irregular expenses – such as insurance premiums – that don’t occur every month, add up the annual total and divide by 12 to get the average cost. It is generally a good idea to build your budget around what you make in a more conservative month. For example, if you make around $5,000 most months, don’t create a budget around what you could afford for the occasional months you make $7,000.
Step 3: Pay Your Own Paychecks
The key to budgeting on a variable income is creating predictability. Once you determine your expenses, you’ll know what the bottom line is for you to live comfortably. Open a separate savings account for all your earnings – this is where all of your paychecks should be deposited. Then, every 2 weeks, pay yourself! Based on your expenses set out in your budget, transfer a predetermined amount of money into your checking account. This will be your “paycheck”. What’s left in your “earn” account will be cushion for those months where you earn less. It is also wise to consider opening a “reserve” account for irregular expenses. Use this account to deposit the average monthly costs for these items, such as insurance premium and taxes. This way, when they’re due, you’ve already “paid” these costs and have money available to use from the reserve account without your savings or “earn” account taking a big hit.
Living paycheck-to-paycheck is never a good idea, but is especially risky when your income isn’t predictable. The most important thing to remember is that when on a variable income, the months where you earn more are not an excuse to live extravagantly! Use these months as an opportunity to save and leave yourself enough cushion so that if you do have a slow month from time to time, you’re well prepared! Budgeting is essential for those without a fixed income, but remember that budgeting wont be as straightforward for you. There will be kinks to work out along the way, so reassess your budget every month, make adjustments where necessary and keep these strategies in mind to help you ensure you are able to stick to your budget and save.
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