Budgeting when your income varies from month to month can be difficult, but with the right formula, you can learn how to do it without all of the headaches that an irregular income can bring.
Every family should have a working budget that is zero balanced based. This means that every bit of income is accounted for, whether it goes toward a bill or a savings account. The income going out must match the income coming in. It is when that income is different each month that things can get a little tricky.
Variable income may be more common than you think. Freelance professionals, contractors, actors, home business owners, sales professionals, seasonal workers, hourly workers, or anyone with a profession that relies on different jobs or projects will usually experience a variable income. Some months are flush while other months are low-income ones. Not knowing what your monthly income is going to be can daunting, which is why many people with variable incomes decide not to budget at all. This is a mistake.
Without an established budget, someone with a variable income is very likely to overspend during the good months and starve during the poor ones, or at least skip savings and run up debt. It is a natural occurrence. When it takes everything you have to make things stretch during the lean months, you naturally want to have a little fun and spend a little more when times are good. Creating a steady budget will keep a family on an even keel and help steer them toward a healthy financial future.
First start by establishing a family budget. Enter all of your regular non-changing bills, such as mortgage, phone, school fees, etc. Next, add in bills that might vary, such as the electric bill or the amount you generally spend on groceries. Look at your spending from the last few months and estimate for these expenses. For example, if you live in a variable climate, your heating bills will be higher in the winter, unless you are on a budget plan with your provider (which is a good idea, by the way), so average it out.
These are the bills that you absolutely have to pay. Anything else, including the cable bill, clothing allowance, and entertainment costs, are discretionary. The amount of discretionary income you have to spend will depend of course on what is left over from your income after the main bills are paid. Don’t forget to add in a line for savings or debt reduction.
Now we get to estimating income. Your work will be easy if your income has been steady over the last year. Simply take last year’s income and then divide it by twelve. This will give you a good estimate of what you can spend in a month. If you had an exceptional year, you might want to cut this amount down to be safe. It is alway best to be conservative with your income, as it is much easier to adjust upward if you make more, or save the extra and use it for some fun or practical purpose at the end of the year.
If you work on a salary plus a commission, budget as best you can to live on your salary. This gives you a steady number, and the commission can be used toward debt, home improvement, a vacation, a savings account, investing, or anything you like.
What if you just started a job with a variable income? You’ll have to estimate an average on your own. Talk to your boss or others in the industry. With this type of situation, it is more important than ever to be conservative about your earning potential. After three to six months, you may be able to adjust your budget. It is always easier to add income than it is to cut expenses.