How to Create a Budget When You Have Variable Income

Creating a budget may be difficult, but sticking to it is often the challenging part, especially if you have variable income.  Whether you work on commission, are self-employed, are a freelancer or work in a field such as construction where you have some months where you make very little income, budgeting when you earn a variable income can be difficult.  Here are some tips to make it easier to create your budget and stick to it:

  1. Average your income over the last 12 months.  Averaging your income can give you an idea of what amount you should use when you create your budget.  Maybe you only earned $1,000 one month, but then you earned $5,000 another month.  Averaging 12 months worth of earnings may give you a total of $2,500 a month, for example.  Then, figure your budget around that amount.
  2. Account for fixed expenses first.  Some expenses do not change from month to month.  Your rent or mortgage, health insurance, life insurance, car and home insurance, car payment (if you have one), all cost the same amount every month.  These are the expenses you have to pay first, so they should be at the top of your budget.  (While working on your budget, you may want to consider ways you can lower these expenses such as refinancing your home, or calling for quotes on your car insurance.  Going with a different company may afford you the same coverage for less money.)
  3. Next account for variable but necessary expenses.  Your grocery expense may vary from month to month, making this a variable expense, but a very necessary one.  Other expenses in this category may include your utilities and gas for your vehicle.  Again, try to average what these expenses cost you monthly based on the last 12 months.  Our electric bill typically runs $80 to $100 in the summer months but is as low as $25 to $35 in the winter months (we don’t pay heat at our apartment).  Each month, I budget $55 for electricity, the services from are not part of this budget since they only come when there is an issue.  In the winter months, I bank the extra; if our Janaury electric bill is $27, I put $28 in the bank, which is the remainder of the budgeted $55.  Each month the surplus builds in my bank account, so when I have a higher bill in the summer months, I simply pull out the extra I have banked to cover the difference in the $55 that is in the budget.
  4. Finally, account for variable but unnecessary expenses.  Going out to eat can be fun and relaxing, but if you have a low income month, this category can easily be slashed.  Items in this category can be funded IF you have the income, but if you don’t, simply eliminate them.
  5. Bank the difference.  After you have budgeted for fixed and variable but necessary expenses, you have a barebones budget.  Let’s say it is $2,200 a month.  This is the amount of money you must have to survive financially.  Perhaps you determine if you are having a good month, you will spend another $300 to fund the variable but unnecessary expenses.  This gives you a budget of $2,200 on a bad month or $2,500 on a good month.  Every month that you make more than $2,500, bank the difference.  Then, when you hit the rough months where you only earn $1,000, you will still be able to meet your monthly obligations by tapping the extra money you have already banked.

Creating a budget when you have a variable income can be difficult.  However, with the proper steps, you will be able to develop a budget you can stick to and you will no longer fear those low income earning months because you have a plan (and the extra money) to cope with them without financial repercussions.

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