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How to Create a Budget When You Have Fluctuating, Variable Income

According to a 2017 report from the Bureau of Labor Statistics, more than 21 million American workers are:

  • Contingent (temporary) workers, either directly employed or employed through temp agencies
  • Independent contractors
  • On-call workers without regular hours
  • Workers employed through contract firms

None of these workers earns regular, predictable salaries. Nor do millions more part-time workers whose hours – and paychecks – are at their scheduling managers’ mercy, or commissioned workers whose income fluctuates due to forces beyond their control.

While budgeting might not be brain surgery, it’s a lot more difficult when you don’t know exactly how much you’ll take home each month. I would know; I haven’t held a salaried job in years, and although time has improved my irregular-income budgeting skills, I still miss the mark some months.

If your income varies from month to month, here’s how to build a budget that meets your needs, as well as some tips for staying within that budget.

Step-by-Step Guide to Budgeting on Variable Income

If you’re a non-salaried worker – a solopreneur, freelancer, contingent employee, or someone who owns a seasonal business – then this step-by-step guide to building a realistic, sustainable budget on an irregular income may work for you.

I say “may” because the non-salaried workforce is dizzyingly diverse, so it’s impossible to account for every unique financial circumstance within that category. You may find that a modified version of this approach – or something entirely different – works better for you. But this is a good place to start.

1. Add Up Your Non-Discretionary Spending

First, add up your non-discretionary spending. This is the budgetary baseline that, for the most part, is fixed and non-negotiable. Non-discretionary expenses include:

  • Housing. This category covers rent or mortgage escrow payments. Mortgage escrow typically includes principal and interest, property taxes, homeowners insurance, and perhaps homeowners association dues.
  • Utilities. This category includes bills for electricity, water service, heat, and telecommunications, such as cell phone and home Internet plans.
  • Groceries. Exclude restaurant meals and other discretionary food and drink purchases from this category; we’re talking about the bare essentials here.
  • Transportation. This category includes fuel, vehicle maintenance, bike maintenance, and public transit fares.
  • Insurance. This category may include premiums for auto insurance, renters insurance, health insurance, life insurance, and disability insurance. If they’re not withheld from your paycheck, you may include contributions to health savings accounts, flexible spending accounts, and other tax-advantaged accounts designed to cover non-discretionary expenses.
  • Debt Service. This category may include installment loans, such as secured auto loans and unsecured personal loans, and revolving debt, such as credit cards and home equity lines of credit. It’s always advisable to pay your credit cards in full each month, rather than making just the minimum payment. If you use rewards credit cards for everyday spending, you’ll need to pay those bills by their due dates each month, or interest and late payment charges could throw your budget out of whack.
  • Child Care. This category may include day care, nanny or au pair care, and babysitter pay. For older children, it may include school tuition and fees as well.
  • Taxes. Many non-salaried workers aren’t subject to tax withholding. If you’re in this boat, you may be obligated to make quarterly estimated tax payments to federal or state revenue authorities or both, though you can wait until the tax filing deadline and make lump-sum payments if you’re willing to pay the requisite late payment penalties. Divide your quarterly estimated tax payments by three to find your monthly tax obligation, then set those funds aside in a high-yield savings account.

If you’ve merged finances with a partner or spouse, include that person’s expenses in your budget calculations as well. You’ll also include their income, irregular or not, in your income calculations.

2. Calculate Your Average Monthly Discretionary Spending

Next, calculate your average monthly discretionary spending. If your income is seasonal, meaning you receive the bulk of it in just a few months out of the year, look back 12 months to capture the entire cycle. Even if your income exhibits no real seasonal patterns, looking back at least 12 months makes for a bigger sample size and, potentially, a more accurate average.

To find your total monthly discretionary spending, pore over statements from every account you use for everyday spending. These might include:

  • The checking account tied to your debit card
  • Any credit cards you use regularly
  • Any reloadable prepaid cards you use regularly

If you primarily use cash for everyday spending, add up your bank account withdrawals, then subtract any cash left on hand at the end of each month.

Calculate your discretionary spending for each month in the period you’re reviewing, add each month’s discretionary spending, and then divide that total by the number of months in the period. The result is your average monthly discretionary income. If your average monthly income – which you’ll calculate in the next step – reveals that you’re spending too much each month, you’ll look to trim discretionary spending first before taking more drastic measures.

3. Calculate Your Average Monthly Income

Next, calculate your average monthly income. Pore over your bank account statements to determine your actual income – not invoiced payments due or pending commissions, both of which may exceed the actual income you receive in any given month – over the same period. Add in income from your spouse or partner, if applicable, bearing in mind that even if your partner earns a regular salary, your combined household income is still irregular. Add up each month’s total, then divide by the number of months in the review period to find your average monthly income.

4. Set Aside Savings

Your savings contributions are technically discretionary. In a true financial emergency, you’d pause contributions to goal-oriented savings accounts, such as accounts earmarked for a down payment on a house, and tax-advantaged accounts for long-term needs such as higher education or retirement.

However, as a non-salaried worker, you face greater financial uncertainty than someone protected by a traditional employment arrangement. Saving for the future – and for unforeseen financial emergencies, in particular – should, therefore, be a priority. You can either:

  • Set aside funds earmarked for savings and investment accounts out of your gross income, before paying your salary in the next step
  • Treat savings as discretionary expenses, similar to set-asides for taxes and housing

If you contribute to multiple savings buckets, assign each a priority level. During lean months, you may need to defer lower-priority contributions.

Pro tip: If you don’t have a retirement account set up yet, start today by opening a traditional IRA or Roth IRA with a low-cost, beginner-friendly online stock broker. I’m partial to J.P. Morgan Investing.

5. Pay Yourself a Salary Based on the Sum of Your Expenses

Now, for the fun part: paying yourself. For the best results, deposit your “salary,” drawn from last month’s income, into the checking account you use for day-to-day spending – or the one you use to pay off the credit cards you use for day-to-day spending. Do this on the first day of each month.

Your salary should be the bare minimum necessary to cover your monthly discretionary and non-discretionary expenses. If you consistently earn much more than you spend, or your spending varies little from month to month, you may feel comfortable paying yourself a salary equal to your average monthly expenditure. Otherwise, set your salary at the lowest monthly spend in your review period and adjust your discretionary budget accordingly.

Although you should aim to end the month with almost nothing in your day-to-day spending account – a practice known as zero-sum budgeting – it’s obviously better to run a surplus than a deficit.

6. Separate Discretionary & Non-Discretionary Funds

By definition, your discretionary expenses are more important than your non-discretionary expenses. Formalize this distinction, and avoid the temptation to overspend on the discretionary side, by keeping your funds for the two categories separate, either in two separate deposit accounts or two separate columns on your budget ledger.

If you’re worried about non-discretionary expenses getting lost in the shuffle, schedule one day each month – perhaps the first – to pay all those bills at once and zero out your non-discretionary spending for the period. Alternatively, set a calendar reminder a few days before each due date.

Tips for Sticking to Your Budget

By definition, budgeting on an irregular income is an inexact exercise. After a good month, you’ll have more than enough to meet your baseline and budgeted discretionary spending. After an average month, you may have little to nothing left over. After a really bad month, you may need to trim your discretionary budget to make ends meet.

A sound, lean budget smooths out the vagaries of irregular income and reduces the need for on-the-fly budget cuts and deferred spending – as long as you stick to it. These strategies can help you do that.

1. Always Save the Excess

Sticking to your irregular-income budget is much easier when you also stick to a basic principle of personal finance: always save the excess.

Have $10 left at the end of the month? Nice. Don’t buy two lattes with it; stash it in a savings account instead.

Have $50 left at the end of the month? Great job! Resist the temptation to treat yourself to a nice dinner and put it away instead.

Have $200 left at the end of the month? Wow! You know what to do.

This principle also applies to periodic windfalls, such as an annual tax refund. The more you put away when times are good, the more you’ll have to draw from when lean times hit.

2. Maintain Separate Accounts for Revenue & Spending

Non-salaried workers should have at least three FDIC-insured liquid accounts:

  • One checking account to receive income earned throughout the month (if you have a formal business entity, this could be a business checking account)
  • Another checking account to hold funds earmarked for short-term spending, the beginning-month balance of which should equal the sum of your discretionary and non-discretionary budgets
  • An interest-bearing savings account to hold the difference between your gross income and monthly budgeted spending

This is the minimum number. Some non-salaried workers prefer to isolate funds earmarked for tax payments in entirely separate accounts; others maintain multiple goal-oriented savings accounts or certificates of deposit. But don’t feel like you have to do too much at once. If you’re new to this budgeting thing and typically don’t have much left over after expenses, start with these three accounts.

The goal here is to create distinct, purpose-based silos for funds that, under normal circumstances, should never commingle.

3. Build an Ample Emergency Fund

An emergency fund is one of the three types of savings everyone needs. A basic emergency fund should be large enough to replace three months’ expenses; the ideal emergency fund doubles that. Keep this fund in a high-yield savings account from a top-rated online bank. I recommend CIT Bank or Simple, but there are plenty of options for frugal savers.

Workers with irregular or seasonal income are particularly vulnerable to financial strain. If you’re an independent professional, small business owner, or seasonal employee without sufficient emergency savings, prioritize that reserve over longer-term savings and goal-oriented accounts. Should your income unexpectedly crater, or a major expense arise out of the blue, you’ll appreciate that cushion. See our guide to building an emergency fund on an irregular income for more.

4. Look for Ways to Bring in Extra Money

Wouldn’t it be nice to right-size your budget with the wave of a magic wand? Alas, that’s not how budgeting works. However, if you have time and talent to spare, increasing your income may prove more fruitful than agonizing over how much to cut your grocery or clothing budget this month.

Money-making strategies and side hustles to consider include:

5. Enroll in Autopay

Absent a financial emergency that demands a draw on your emergency savings, missing a preset payment due date is an unnecessary error that may increase your net expenses if you incur a late payment fee or penalty interest, and it will throw next month’s budget out of whack. If the payee reports the missed payment to the major consumer credit reporting bureaus, the lapse may hurt your credit score as well.

Thankfully, this particular error is preventable. Virtually every corporate payee – such as mortgage servicers, credit card issuers, and utility companies – offers an autopay option. Many allow you to set your own due date for added flexibility. For non-corporate payments – for instance, rent paid to the individual or single-member business entity that owns your residence – your bank or credit union probably allows you to schedule recurring bill payments through its bill pay suite.

6. Regularly Re-Evaluate Discretionary Spending

Every three to six months, thoroughly re-evaluate your discretionary spending. Look for obvious fat to trim, such as a gym membership you don’t use or a gold-plated Internet-cable-phone package when an Internet-and-basic-cable bundle will suffice. You can also use bill negotiation services like Billfixers, which attempt to negotiate lower rates on these expenses and may reduce your monthly expenses.

Keep going. Comb through bank and credit card statements for egregious one-off purchases like that spur-of-the-moment concert or fine dining experience. Excise the fat and look for sensible ways to reduce these one-off purchases. For instance, you don’t have to swear off dining out altogether, but you can limit fine dining outings to truly special occasions, such as your wedding anniversary or birthday.

7. Use the Envelope System to Control Impulse Spending

If you’re tired of fighting off the temptation to overspend, the envelope budgeting system can render impulse spending all but impossible.

Envelope budgeting is simple. Each spending category gets its own physical envelope with enough cash to cover its budgeted amount for the month. If you spend $300 on groceries each month, your grocery envelope gets $300; if you dine out to the tune of $150 each month, your dining envelope gets $150. When the funds in an envelope run out, you’re done spending in that category until the following month.

You don’t have to go all-in on envelope budgeting to utilize its temptation-neutralizing power. Many “partial” envelope budgeters use it for discretionary spending only, while continuing to make non-negotiable payments for things like housing and electricity from their checking accounts.

Final Word

As mentioned before, this is only one possible budget-building process for workers who, for whatever reason, don’t earn steady paychecks. You may arrive at a modified approach – for instance, one that emphasizes aggressive long-term savings and minimizes spending with an eye toward financial independence. Or you may determine that an entirely different budgeting method is warranted. As long as you adhere to sound principles of personal finance, you’re free to tweak your budget however you like.

Is your income irregular? How do you stick to your budget when you don’t know how much is coming in?

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.