How to Budget When Your Income Varies
By Lacey Langford, AFC®
Not knowing the exact amount of income you'll earn can wreak havoc on your budget and financial goals. Not knowing your take-home pay makes it hard to know how much you can spend. The monthly income in careers like freelancing
, sales, coaching, real estate, and insurance agents can be a roller coaster.
As a financial coach, business owner and money professional, I understand the need to plan for irregular income from both sides. My coaching income varies from month-to-month, which makes it challenging to plan my finances with certainty.
But I also know the importance of planning for variable income. You may not be able to plan perfectly, but you can take steps to get it pretty darn close. Getting it close will ultimately make money management more effortless.
Here are some steps to help you plan your budget when you have variable income.
1 - Create a personal financial forecast
The best place to start budgeting if you have variable income is to create a forecast of your financial situation. Financial forecasting is when you estimate your future financial earnings by looking at your past income.
Looking back at the last 3-6 months of your pay can help determine your average income, which is helpful when preparing a monthly budget and predicting future cash flow.
You'll also want to try and forecast the highs and lows of your industry's income cycles or seasons.
For example, most real estate agents make less money on home sales during the winter compared to their peak earning season in the summer. Many people in the service industry also have slower seasons when they get less tip money.
Anticipating when you'll earn less money can help you prepare your monthly budget and decide when to save extra money to cover lean times.
2 - Plan for irregular expenses
There are three different types of expenses:
Understanding each can help in the budgeting process. Fixed expenses
do not change from month-to-month. They include bills like your rent or mortgage, loan payments, and some insurance.
are things like food, gas, and electricity.
, or seasonal, expenses are irregular expenses that you do not incur each month such as vehicle registrations, taxes or oil changes. They may not happen monthly but you still want to make sure they get paid.
Accounting for irregular expenses is crucial for money management.
Small business financial coach, Sylvia Inks
, recommends totaling all your irregular expenses, like car registrations, new tires, or car maintenance. Use those numbers to set your savings goals for irregular expenses. Next, divide that number by 12 to get the amount you should save each month to prepare for that expense.
Each month, move that money into a savings account separate from your checking account and emergency fund savings
. Then it's available to transfer to your checking account when you need it.
Moving irregular expense money into a separate savings account can help you maintain a healthy budget and prepare for the leaner months.
3 - Prioritize your expenses
Having a clear picture of your income and expenses makes it easier to plan and prepare for fluctuating income. Prioritizing your expenses makes it easier to decide what spending habits to keep and what to cut back on. To start prioritizing, first separate your expenses into basic essentials vs. discretionary spending.
include your housing costs, utilities, food, healthcare, and transportation costs (you have to get to work).
“Quality of life”
or discretionary expenses would be things like cable, eating out, and entertainment. If necessary, these are the costs that can be cut immediately.
4 - Create a budget
While financial forecasting helps predict future income, a budget is a picture of your current financial state. It’s a plan for what you’re earning and what you are spending.
The best way to budget when your income varies is to be conservative with your monthly spending and liberal with your savings. And you want to have some flexibility to adjust your budget when needed.
When you're in periods of earning higher income, use the opportunity to get ahead. Pay down debt and save more. When you're in times of lower income, stick to the basics. Pay your bills on time, and don't do any unnecessary spending.
When your income varies, it’s a good idea to use a zero-sum budget to account for every dollar you earn and spend. Zero-based budgeting is applying all of your earnings to your expenses, savings, and debt. The results of this method should be zero after you subtract all your expenses from your income.
There are plenty of budgeting methods out there, including creating a budget worksheet, keeping a budget spreadsheet, using a budget app, or using the cash or online equivalent of envelope budgeting. Ultimately, the best budgeting option for you is whatever one you can stick to.
5 - Live on your lowest income
When you're in an industry like coaching, sales, or freelancing, there will be times where you make plenty of money and others you don't make enough to meet your monthly operating expenses.
Because of these fluctuations, be conservative with the money you spend.
Living on your lowest income is a great way to balance out your high-income months with the months when your income is less than par. It's a chance to build up your checking and savings account balances in the good times, and not suffer as much during the hard times.
6 - Create an emergency fund
Saving for emergencies
is essential when your income varies. Building up your savings provides self-insurance that you'll still be able to pay your bills plus any unexpected expenses that come your way.
The general rule for emergency funds is 3-6 months of basic living expenses. If your household has a second income, three months of living expenses is enough. But if you only have one source of income, it's recommended you save six months (or more) of your monthly expenses set aside.
7 - Have a side hustle on standby
Hopefully, all your planning and preparation will keep your finances on track during low earning months. But if you have times when you need additional income to meet your financial needs, side hustles
are ways to make money quick.
Side hustles don’t have to be long term job commitments, they’re just enough to get you through. Look at money-makers like dog walking, car driving services, and running errands to see you through to the higher-earning months.
Remember this – forecasting and budgeting are vital for keeping your money management running smoothly when your income varies. Taking the time to forecast, budget and build up your emergency fund will reduce your stress, save you money, and keep your finances on track.
About the author
Lacey Langford, AFC® is The Military Money Expert® and the founder of LaceyLangford.com, a personal finance blog specializing in the unique world of the U.S. military. Lacey's the creator and host of The Military Money Show, a podcast dedicated to helping the military community with personal finance. She's an Accredited Financial Counselor® with over 15 years of experience in financial planning, counseling, and coaching. Her education includes an Executive Certificate in Financial Planning from Duke University and a B.S. in Finance from the University of North Carolina at Wilmington. As a U.S. Air Force Veteran, military spouse, financial coach, speaker, and writer, she changes people's lives from being fearful of money to having control and confidence with it.