Budgeting for irregular or variable income may seem challenging, but it’s really not difficult. It just requires a little more planning. A variable income budget can be just as effective as a fixed income budget.
I suppose irregular income is probably most common in sales oriented or commission based positions, personally owned businesses and seasonal type work. For many such jobs the income each month varies by how well the business is doing, or the time of year (common for real estate sales professionals).
Budgeting with Fixed and Variable Income
Let’s first take a look at a situation in which there is both fixed and variable income. If you have both fixed and variable income you’ll want to try your best to arrange your budget around the fixed portion because it’s predictable and easy to plan spending.
Ideally, when the variable income income arrives, it can be used for purposes other than meeting the monthly expenses. Since all or most of the expenses are hopefully covered with the fixed income, the variable portion can be used for helping you excel in other areas of personal finance. These areas may include meeting financial goals such as emergency savings, debt reduction or even short – term savings for vacations. Or, in building a cash reserve (mentioned below).
Certainly, if there is money left over after expenses from the fixed income it can and should be used for these areas too.
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Budgeting with Variable Income Only
Now let’s take a look at budgeting with variable income. This is a situation in which you have to use variable income to pay the bills and meet important expenses (such as food) each month.
1. Relax and prioritize your spending
Relax your spending and expenses as much as possible. Commission only jobs are some of the most lucrative, but not typically in the beginning. Your commission will be based on your hard work, networking and learning your product. Until this time, keep your expenses low!
Also, it’s important to make a list of your most important expenses as well as estimate your expenses. If you have a low month and don’t have the cash reserves you’ll need to pay what’s most important first.
2. Estimate your income
If you’re dependent upon variable income alone you’ll want to first do some estimating based on the average of this income. To budget variable income take your last 12 paychecks (or the best history you can get) and average them to get a starting point.
But, what if you don’t have 12 months of history because you’re starting a new job? If you don’t have a lot of earnings history talk to people who do. You might speak to your boss or others in the field and ask them what is reasonable or expected for the first year of your commission only job.
3. Refine with conservative estimates
So, now that you know the average or about how much you’ll make you can decide if you want to be a little more conservative with your estimate. You might consider taking the average and reducing it a little further just to be on the safe side. Take a look at dropping the number 10% and see if you can still meet expenses and have money for giving and saving purposes. If so, you’ll appreciate being on the conservative side if your paycheck is lower certain months.
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4. Create a reserve account
You need a reserve or short-term savings account to draw on to cover expenses for months when your paycheck is less than estimated (perhaps it’s a seasonal sales reason). Ideally, you’ll want to save up one month’s income to cover such times. Try using bonuses, tax refunds or extra money to quickly save up your reserve account.
5. Refine your budget
Once you’ve been moving along for a few months you can determine if changes need to be made. As with any budget, you need to monitor your spending and determine if you need to cut back in certain areas. Or, perhaps you have to work a little harder to increase your variable income!
What do you think about these tips for budgeting when variable income is involved?