A reader (I’ll call her Martha) recently emailed:
I have a problem – How does one set a budget and plan to pay off debt on a variable income? Can you recommend a budgeting plan for those of us who don’t know exactly what we’ll be making each month? I wish I could get into a routine with my money!
Martha, I’m actually using the following budget system to manage my money, because I receive portions of my income on an irregular schedule.
You will need the following resources (please see the bottom of this post for affiliate links to the resources that I actually use to manage my finances.)
A checking account with free checking and free online bill pay.
A program / spreadsheet / notebook to track income and payments.
A savings account with no minimum and online access. (Optional)
The Basic Idea:
Instead of worrying about an irregular income, we are going to use our savings account to smooth things out and create a regular source for income. Here’s how.
The System:
1. List all of your financial obligations, expenses, and goals, in order, based on how important they are to you. Remember, start with items/services that are necessities and work you way down to items that are niceties. Here is a simplified example:
- Food
- Shelter
- Transportation
- Clothing
- Insurance
- Credit Card Payment
- Eating Out
- Extra Debt Payment
- Entertainment
- Vacation
Priorities will vary (widely) from family to family, but it is important to prioritize you list of outflows. Don’t forget to include irregular expenses, such as car tag fees, annual insurance payments, or other non-monthly expenses. These obligations, expenses, and goals now become your budget categories.
2. Next to each item in your list, estimate the monthly amount that you should allocate to a particular budget category.
(Remember, if you have an annual or semi-annual payment, you will need to calculate the number of months between today’s date and the date that payment is due. Divide the annual payment by the number of months and you will know how much to budget, per month, so that you have enough money to make that payment.)
3. Now, when you receive a paycheck (or other income), deposit it into your checking account. Use the income to make any payments that are due, starting at the top of you list and working your way down. Remember to withdraw enough cash to handle cash-transactions (food/gas). Any amount “left over” is transfered to you savings account. (Leave enough money in your checking account to avoid fees or for small, unexpected expenses.)
4. Over time, the amount of money in your savings account will grow. When your income dips, you will reverse the process. Instead of making contributions to your savings account, you will make withdrawals. If you have a payment coming up, you will withdraw enough money from your savings account to make that payment.
Confused? Don’t be. It’s really quite simple. In the months that you have “surplus” income, you will work you way down the list, making payments and putting money away for future purchases / bills / goals. In the months where income is “lean” you’ll be focusing on necessities, and dipping into savings to make up for any shortfall.
Eventually, you will be able to build up enough money in your savings and you will not have to worry about when you receive income. Instead of making deposits into your checking account and using that money for current expenses, you will make a deposit into your savings account and wait for the bills to arrive. You will be a month (or more) ahead, prepared for the bills that are coming.
Summary:
If you have a ‘good month’, store a portion away in savings. If you have a ‘bad month’, focus on the categories at the top of the list and then use your savings, if you must.
I have a semi-variable budget, but fortunately, I can use my salary for expenses. I really like this program, which resembles an emergency fund – maybe a lesser emergency fund?
JvW… Exactly! There are various names – freedom fund – but, basically, you are creating a modified emergency fund – slush fund – anything fund..
NCN
I work on straight commission and my monthly income varies greatly. This June I made more money in one month than I did total in 2003. In order to make sure I balance things out in my budget I took the last 4 years of pay stubs and gave myself an average monthly allowance to work with. I just started working with a budget and I’m already saving. Taking my lunch to work (religiously) has saved me tons of cash that I’m now using to pay off my personal debt.
we live on a variable income and it took us quite a while to work out a reliable budget. but, we have it down now and we’re making great strides with our financial goals.
the first key is to UNDERestimate your monthly income. this is very important. knock down your estimate as much as is tolerable to cover the basics of your budget (don’t forget your savings account!). let’s say that your average income (after looking at a whole year) is $2000 a month. use $1750 as your estimated monthly income instead & then follow the rest of NCN budgeting system.
this technique has done wonders to improve our finances and stress each month. if you try to budget by using the figure that you get by calculating the actual average per year ($2000 in the example above), it can lead to frequent high stress. using an underaverage will also help you better maintain that emergency/floating fund & build up your savings/reduce your debt, etc…