Managing Fixed Expenses With Variable Income

Creating and maintaining an effective and realistic budget can be the essential foundation of managing your money. Making a budget is actually fairly easy when you have a dependable income that is constant from month to month. But what do you do when your income varies from one month to the next? You might have a job or career where income variation is quite common. Meanwhile, your expenses remain the same, but your income doesn’t. You still need a budget. You just need to go about it differently.

Total your expenses

When you’re creating a variable-income budget, start by totaling your income as you would if your income was fixed. Add up the things you spend money on every month. This includes rent/mortgage, utilities, automobile loan, automobile insurance, health insurance, life insurance, phone bill, loan payments, credit card payments, and taxes. You should even calculate how much you’ll spend on variable expenses like gas and food.

Average your income

If you had a variable income last year, also, use your last tax return to come up with an average monthly income. Just divide your gross income by 12 to come up with an average monthly income. If you don’t have a year’s worth of income, average the months you have. For example, if you have been freelancing or contracting for 6 months, add up the last 6 months of income and divide it by 6. This will give you an average income to base your budget on.

Does your average monthly income exceed your expenses?

Your average monthly income should meet or exceed your expenses. If not, you are going to run into a cash flow problem. Adjust your expenses to fall below your average monthly income. Some examples of places you can reduce are: gas, food, utilities (save on electricity), and entertainment. For more ways to reduce your expenses, review each category and decide whether it’s a requirement or a want. Wants can be eliminated.

Your budget in practice

You should have at least three accounts – one checking account and two savings accounts.

The checking account will include your monthly income that you use to cover bills and other expenses.

One savings account will include your income then be used to “pay” yourself at the end of the month.

The other savings account is for savings. You will only deposit money into this account. You should never withdraw money from it unless it is to invest it in a higher interest rate account.

Start your budget at the beginning of the month. Your checking account needs to have enough in it to cover your expenses for the month.

As you get paid throughout the month, place the money into Savings Account #1. You shouldn’t have to touch your savings account during the month. If you do, then you didn’t budget enough for your expenses or you’re overspending (or you ended up getting paid less than average. At the end of the month, around the 28th, transfer $2500 (or what you need to cover your expenses) into your checking account.

Less than average months vs. higher than average months

When your income varies, some months will be less than average and some will be higher than average. Once you’ve been using this variable-income budgeting method for a few months, you won’t notice the ups and downs of your budget as much. The surplus months will build up your savings account to help offset the “famine” months.

However, if you experience a “famine” month in the first 1-2 months of using this variable-income budgeting method, you might have trouble meeting all of your financial obligations. In this case, you have a few options. Reduce some of your expenses (the best option). Retrieve from your emergency fund (which ideally has 6-12 months of living expenses). Access your savings (only when options 1 & 2 don’t work).

Don’t let a famine month discourage you. Like I said earlier, once you have a couple of months where your income is at or above your average income, your savings will build up and the bumps will smooth out. Give it six months and you’ll be pleased that you did.