If you’ve read a few articles on how to create a budget, they often recommend you start by determining your monthly income. When you’re a business owner, work variable hours, or earn commission, that’s easier said than done. A variable income, or one that changes month to month, means you’ll never know exactly how much you’ll earn each month. But since your income can change, it’s also essential that you create a budget to stay on top of your finances.
Understanding how to budget with a variable income can help you to track your spending, save for major expenses, and even build up some extra savings to help you get through months when your income is lower. Read on to learn how to create an irregular income budget that puts you in control of your finances, even when your income fluctuates.
Steps To Take When Budgeting With An Irregular Income
1. Determine Your Lowest Monthly Income
To start, look back at your income for the past six or so months and determine the lowest amount that you made in a single month. This is the monthly income that you will use when creating your budget. Using this lowest amount helps to ensure that you’re prepared to pay your bills, even if you have another low-earning month.
It can also be helpful to compare your highest earning month, during that period, to your lowest earning month. The difference identifies how much your income fluctuates.
If you’re self-employed and taxes aren’t already deducted from your income, then you’ll need to set aside money for taxes. After you’ve set aside tax payments, use your resulting net income for your budgeting calculations.
2. List Your Essential Monthly Expenses
Now it’s time to list and calculate your essential monthly expenses. These are the bills that you must pay every month, including your rent or mortgage, utility bills, food costs, health and car insurance, car payment, and any minimum debt payments, such as student loan or credit card minimum payments.
Once you’ve listed out those expenses, add them all together. The resulting figure may be higher than your lowest monthly income, which you’ll address later on in the process.
3. Identify Additional Monthly Expenses
Make a list of other monthly expenses that aren’t essential, too. These expenses might include contributions to savings accounts, making larger payments on your credit card than the required minimum, and fun spending and wants, such as dinners out, streaming services, entertainment, shopping for non-essentials, and vacations.
4. Calculate Your Budget with Your Lowest Monthly Income
Using your lowest monthly income, start working your way down your list of essential monthly expenses, paying off each one. You might only make it partway down the list before you run out of money. If that happens, list out the essential bills that you haven’t yet paid.
There are a few ways to pay the remaining essential bills. First, look at your actual income for the month, once you have set aside money for your taxes. If the income is higher than your base income, you can draw from that extra money to cover those essential expenses.
If your income this month is equal to or less than your lowest monthly income figure, you will need to borrow money from a buffer account to cover your expenses. Your buffer account is a special savings account that you can use during months when your income is low, and then build up again during months when you have a higher income.
Don’t have a buffer account yet? We’ll get into how to create one in the next step. If you find yourself with unpaid essential bills and no buffer, then it’s time to look for an alternative way to pay those bills, such as by putting them on a credit card that you pay off next month, or by borrowing money from family. You might also look into solutions, such as taking on a roommate, to help generate additional income to cover your expenses.
On the other hand, if you have money left over, you can use it to start paying some non-essential expenses. Keep in mind that your non-essential expenses may need to fluctuate with your income. In months when your income is higher, you can enjoy some non-essentials such as dinner out or a trip to the movies. When your income is lower, those expenses will need to wait for another month.
5. Create a Buffer Account
Create an additional savings account that will act as your buffer account. In months when your income is higher and you have extra money, set aside some money and put it in your buffer account. You might use a percentage to help keep you consistent, like setting aside 20% of the amount of your monthly income that exceeds your lowest monthly income.
Your buffer account should be only for essential expenses. Having that buffer will help you to always be able to pay your bills without relying on another method, like a credit card or personal loan. Always put money into your buffer account before you use any leftover funds for non-essential expenses.
6. Make Adjustments
When your income fluctuates, your budget will need to change a bit, too. During high-income months, you’ll not only be able to put money into your buffer account, but will have some extra left over, too. You might decide to put more money into savings or retirement accounts, or to increase the amount that you put into your buffer account. While your budget is a helpful guideline, you can change it as your income fluctuates.
You may need to change your budget in the opposite way, too. If you have a few months when your income is lower than the lowest monthly income figure that you first used, it may be time to adjust. You may either need to find a way to bring in more income each month, or you’ll need to restructure your budget using your new lowest monthly income figure.
Ready To Level Up Your Budgeting Methods? Learn More Today
Budgeting is a valuable way to keep track of your income and your savings, but when your income fluctuates, traditional budgeting methods don’t work. Understanding how to budget with a variable income is an important step in managing your finances and making smart money decisions.
If you have more questions about budgeting or help setting up a savings account, Arizona Central Credit Union can help. To learn more, call toll-free at (866) 264-6421, or contact us online.
