How Do I Budget With a Variable Income?

Feb 6 / Dr. Jay Zigmont, PhD, MBA, CFP®

If you've ever dreamed about breaking away from that fluorescent-lit, cubicle-filled office space, and becoming your own boss, you're not alone. But one of the potential pitfalls of starting your own business, becoming a freelancer, or even just working on commission (like real estate agents and some salespeople do) is variable income. When you've got a salaried job, you know how much money you'll be bringing in every month, and it's much easier to budget. Let's take a look at some tips for budgeting when your paychecks vary.

Budget Based on Past Earnings

A common way to approach budgeting in this situation is to look at an average of your earnings. You might also consider making your budget based on your lowest paid month, if it's in the not-too-distant past (it won't do you any good to look at that April five years ago when you made far less than what you're averaging now). Remember to also consider your tax liability when budgeting; if you're not a W-2 employee and instead receive 1099 forms for income reporting, you are responsible for paying taxes out of your earnings throughout the year.

Let's say that you're expecting to continue bringing in about $4,000 a month (after taxes, which could be 20%, 30%, or more, depending on how much you make and where you live). Is that enough to cover all the "musts" in your budget? Your housing costs, utility bills, groceries, etc. are all musts. If it isn't, you need another source of income (or a way to bring more in from your main job). You don't want to go into debt in the course of covering your basic expenses.

Debt is a Danger of Variable Income

You might think you can just lean on your credit cards during your lower-earning months, but this is a terrible idea. Remember, debt is stealing from your future – don't promise that your future self will pay for the items you're charging on a credit card today. 

If you have months where you make more than what you've budgeted for, don't just assume you can just blow that cash. It's a much better idea to save most of your excess earnings, to get you through the lower periods. This is particularly crucial if you're in a line of work where the peaks and valleys are more noticeable, such as seasonal work. You can also use that extra to meet other financial goals, like paying off debt.

Cut Your Spending Initially

When you're just starting off with variable income, it's best to cut your budget back as far as you can. Remember, it might look on paper as if your new business venture will make money, but you won't know for sure until you get started. So watch your expenses like a hawk. And if you're able to put money aside in an emergency fund ahead of time, that will be even better. That way, if you have some tight months, you won't have to resort to your credit cards to make ends meet.
Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth®, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist®, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.

He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.