budgeting on a variable income

Best Budgeting Tips for People with Variable Income

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Self-employed, contractors, freelancers, and commission-only workers can potentially earn more than their counterparts. Some trade-offs come with that too. Income management is challenging when you can’t predict how much money will be coming in during a month. If you are using a personal budget planning system for keeping track of expenses regularly, this can be accomplished much more easily. Ensuring that you are saving more during the better months will also protect you from financial hardships. Budgeting on a variable income is possible with the right plan. We’ll discuss one example of how budgeting for self-employed workers can be done. 

Creating Financial Goals

Goal setting has been proven to be a highly effective way to achieve things. Your short and long-term financial goals are no exception. Monetary targets that you strive to make are considered financial goals. Before you start preparing a budget, sit down, and think about what you want to give financial priority in your life to. Your budget should be the blueprint that helps you reach your financial goals. 

Short-term financial goals are those targets that you want to accomplish in a short time, usually less than a year. Some examples of short term financial goals include:

  • Creating an emergency fund
  • Reduce your spending
  • Save up for a family vacation
  • Save for a down payment on a house

Long term financial goals are those achievements you are targeting for a longer period, including:

  • Child’s college education
  • Retirement savings
  • Pay off debts such as student loans and credit cards

To make your budget and financial goals work together, you must establish realistic and clear goals. For example, let’s say you want to put $6,000 a year towards your retirement savings. If you average $800 in disposable income a month, then your goal is achievable. On the other hand, if you average $400 of disposable income a month, it’s unlikely you’ll be able to save $6,000 in retirement savings. 

Use the SMART approach – Specific, Measurable, Achievable, Realistic, and Time-Bound to create your financial goals. Personal budget planning will incorporate these goals and will set you on the path of reaching that financial priority.

Budgeting on a Variable Income

Budgeting for self-employed workers can be done with the following three steps to manage your variable income. 

Estimate Your Monthly Income

Effective income management is only possible when you are realistic about your monthly income. With an irregular income, calculating your average income by looking at the last 12 months isn’t going to work well. Instead, review all the income you’ve earned over 12 months to find the lowest one. You can only go up from there! This method is especially helpful in adjusting to the first year or two of being self-employed. 

Add up Your Monthly Expenses

You need to know how much money you’re spending each month to ensure that your financial goals align with reality. It will be helpful if you are keeping track of expenses regularly. As with any household budget, this will include rent/mortgage, car payments, student loan payments, minimum monthly credit card payments, utilities, groceries, entertainment, and memberships. 

Because you are self-employed, you also need to account for taxes as an expense. Typically, self-employed workers will pay out their taxes quarterly. It might be beneficial to open a separate savings account for your taxes from your regular savings. 

Once you have listed all your various monthly expenses, they need to be prioritized. Necessities like food, shelter, electricity, and insurance are among the expenses you have to take first. Everything else like expenses for clothes, dining out, and Netflix membership is the “nice to have” category. By keeping track of your expenses, you’ll know where you’ll need to pull back on spending in leaner months. Those coffee drinks from Starbucks and Chiptole will have to be cut, so you aren’t stressing about rent. 

Use the Remaining Balance for Saving

You should allot your leftover money toward your financial goals and a buffer for the lower-income months. It’s fine if one of your financial goals is to lower your debt instead of putting it towards a savings goal. Reducing and paying down your debt enables you to increase the amount you can put towards an emergency fund or retirement in the long run. Ideally, you will have enough remaining after your expenses to put at least 10 percent towards your saving effort.

Strategies for Budgeting for Self-Employed

There are unique strategies that a self-employed individual should add to their tool belt when budgeting. Keep yourself financially prepared with these tips on budgeting with variable income:

Prioritize Your Emergency Fund

An emergency fund is a saving that acts as a cushion for unexpected events such as losing a job, illness, or accident. The result of this unexpected event is a loss of income to handle your day to day expenses. Ideally, you should have between three to six months of expenses in your emergency fund. As a self-employed or commissioned worker, you might have a period where you don’t have any work coming in. An emergency fund can pull you through those gaps so you can continue to meet your basic needs. 

Live on Your Income from Last Month

You can start preparing a budget from your last month’s income as an example. This concept comes from the “zero-sum budgeting” idea, which is that if you live off your income from the previous month, you’re budgeting on real numbers. To do this bare-bones budgeting, you deposit the exact amount of your last month’s income into your bank account at the beginning of the month. That’s the money that you’ll use to live on over the month. If you earn additional income over the month, that will go towards your emergency fund or other savings goals.

This strategy is another way of saying that you need to pay yourself a salary. That steady wage from the first of every month will change your mindset during those months with a lower income. This shift will change income overages to unplanned spending into the surplus being added to your savings goals or paying down debt. 

Use the Zero-Sum Budget for Paying Bills

Using a zero-sum budget plan with your monthly expenses and bills identified, you know how much you’ll need for your bare-bones bills and other spending. That amount should be how much is deposited into your checking account. The rest of your earnings will go into a separate savings account.

The way that the zero-sum budget is designed, you’ll pay your monthly bills using your plan. These “bills” also include your savings and debt repayments. A zero-sum budget can be done using a spreadsheet, notebook, or using an app. Like any other budget, use the method that you prefer.

Predict Your Expenses

Monthly bills and expenses may fluctuate, so make sure you count for them. It would be best to put some expenses like auto insurance, car maintenance like oil changes, birthdays, and holidays into your budgeting. 

One way to manage them is to create a “Reserve account.” Calculate all these irregular expenses over a year and divide them by 12. The amount gives you an accurate estimate of how much you should be saving each month to handle these expenses as they come up.

Pay Down Your Debt

You lessen the pressure you feel by not having credit cards and other loans burdened on a variable income. The simple math is that the less you owe, the more money you get to keep. Try to prioritize tackling your debt and eventually paying it off faster. 

Even if you can only afford to make an extra $25 a month towards that student loan, that will save you on interest. Two of the popular methods of paying off debt is the snowball and avalanche methods. With the snowball method, you order your debt from smallest to largest, and as you knock out each balance, you’re gaining momentum. Here’s what it looks like:

Step 1: Make a list of all your debts from smallest to largest. You disregard the interest rate on these balances.

Step 2: Pay the minimum payments on all your debts except for the smallest balance. 

Step 3: On your smallest debt balance, pay as much as possible each month.

You continue repeating steps 2 and 3 until that balance has been paid off. Then you move on to the next smallest debt and repeat these steps.

The snowball method can be easier to stick to and get motivated by because you will pay down debt faster. The avalanche method targets your debt that has the highest interest rates first and works like this:

Step 1: Make a list of all your debts based on their highest to the lowest interest rate. 

Step 2: Pay the minimum payments on all your debts except for the balance with the highest interest rate.

Step 3: On your highest interest rate balance, pay as much as possible each month. 

The benefit of the avalanche method is that you save more money on interest. However, the most effective debt method is the one you stick to, so that should be your deciding factor.


If you need help to organize your budgeting, make sure to use budgeting apps or a budget planner book to track your bills, expenses and spending.

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