How Do I Budget with a Variable Income?

Everywhere you turn, you hear having a budget is the first piece of the financial stability puzzle. But how do you create a budget when your income varies month to month?

If you’re self-employed or only earn commission, you know one month you can make it rain, and the next, you’re in a drought.

But fear not variable income earners — budgeting is possible with the right strategy. By following the steps below, you’ll be well on your way to shoring up your financial house.

Preparing a Budget on Variable Income

Successful use of a budget gets your money working for you so you can attain your financial goals. It will take some time to reach your goals, but you'll get there much faster with a sound strategy.

You can use a pencil and notebook, a spreadsheet, or an app like Tiller Money to build a budget – just use something you’re comfortable with.

Set Your Foundation

Even though your income may fluctuate wildly from month to month, your expenses should remain relatively stable. Review the last few months of spending and determine how much your absolute essentials cost you.

This tally includes housing, utilities, groceries, medicine, insurance, transportation to work, and minimum debt payments. This number is your threshold. It's the amount you must earn per month without robbing your piggy bank or taking on additional debt.

Next, add up your discretionary purchases like eating out, shopping, entertainment, or saving/investing. These are your “nice to have” expenses you can cut during lean months. (Of course, the ultimate goal is to reach a point of stability, so saving/investing becomes a part of your essential expenses.)

Knowing both your real bottom line or threshold and your preferred bottom line will establish (and maintain) financial priorities.

It can also serve as great motivation to earn more because richer months will undoubtedly be a lot more productive and fun!

Utilize Multiple Accounts

Effective cash management takes discipline. And, let’s face it — many folks aren’t up to the task. To make fiscal prudence easier, set up multiple accounts to avoid spending money you shouldn’t.

You need a checking account for daily purchases and paying bills.

But you should also have a savings account or cushion account where you bank extra cash during your more profitable variable income months.

These funds will accumulate and become a cushion to draw from during lean times. You could use this cushion account as an emergency fund, too (unless you want that money stored elsewhere).

Additionally, if you’re a freelancer or own a business, consider having an account specifically to squirrel away money to pay your taxes.

Finally, once you’ve hit your money stride, have separate savings/investment accounts for goals like paying off debt, buying a house, or enjoying retirement.

Optimize Expenses

As you’re taking a good, hard look at your spending, take note of anything you can cut or reduce now.

By lowering your expenses, you lessen the pressure to earn or end up with a greater surplus of funds you can use to achieve your goals faster.

Tweaking your expenditures is a continuous process. So don’t feel compelled to change everything all at once (unless that’s your style). Start by choosing one expense, like groceries, and research ways to spend less.

In this instance, you could plan and prep your meals, use coupons, buy store brand goods, or try to shop sales.

Once you have a handle on that expense, choose another and repeat the process.

You can make slight changes (resisting lattes or cutting your hair), or you can go more drastic (selling your car or moving to a lower cost of living area). Do whatever makes the most sense for your situation.

Diversify Your Income Streams

If you’re having a hard time making ends meet, consider starting a side hustle or taking on a part-time job.

This doesn’t have to be permanent — only until your other variable income source yields more cash flow or you have a sufficient cushion saved.

Of course, continued income diversification has many benefits like reducing risk from losing one money source and helping you achieve your financial goals faster.

Managing Your Money

Once your cushion account can cover a few months of expenses, it now becomes your main account. All income should be placed in it and funneled from here into other accounts.

At the start of each month, move only what you need to cover your threshold budget and your typical preferred expenses from your cushion account into your checking account.

This will likely be the same amount month to month unless your expenses change.

With all of your varied earnings now routed directly into your cushion account, they will replace what you've withdrawn for expenses — and hopefully boosting the balance rapidly with your success.

This process is sometimes called living on last month’s income or a zero-sum budget.

The goal is to end the month with next to nothing in your checking account but plenty in your cushion account. That means your budget is accurate.

As your primary savings/cushion account accumulates surplus funds, you can then direct some of the money to your other savings goals.

Refine the Process

As is the case with any budget, yours isn’t meant to be “set and forget”. Your financial situation is dynamic (hopefully always in a positive way).

As your variable income, expenses, savings balances, and debt level changes, your budget should be adjusted accordingly.

This will keep you on sound fiscal footing, moving incrementally towards achieving your goals.

Final Thoughts on Budgeting with Variable Income

Improperly managed variable income can lead to severe financial stress. However, by working through the steps in this article, you can find stability using a budget.

Before long, you’ll be in the same (or better!) boat as your regular salary-earning peers.