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Six Budgeting Tips for Variable Incomes

Learn how to budget even when your income varies month to month.

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Everyone now participating in the gig economy has joined commission-based sales people, freelancers and independent contractors as workers whose income varies month to month. Hourly wage earners without a consistent schedule are in the same boat. This lack of a set salary or wage can make it difficult to budget money wisely, but it’s all the more important to do so. Let’s tackle this dilemma and put you in a better position to reach your goals for saving and investing for a financially stable future.

1. Track your income history.

Similar to building a budget based on a consistent salary or wage, you need to know how much money you make each month. For you, this isn’t as simple as multiplying one paycheck by the total number of pay periods in a month. Instead, you need to go back at least six months and calculate how much money you made in each of them before you can determine your average monthly income (total income in six months divided by six). To get an even broader picture of your income, do this exercise for 12 months.

If you’re new to a variable income situation, your first month will be your baseline, and you’ll need to build on that for several months to determine your average income.

Budgeting apps like Mint, PocketGuard and Wally automatically capture your monthly income to make this task easier.

2. Calculate all your expenses.

Knowing how much money goes out each month and for what purpose is just as important as knowing how much money you bring in. Using your checking and savings accounts and credit card statements for at least six months, calculate how much you spent monthly on essentials (your mortgage or rent, utilities, homeowners or renters insurance, groceries, transportation, childcare and payments for student loans, credit cards, HELOCs and other loans). Then, determine your monthly average for each essential category by adding up the total and dividing it by six.

Do the same for non-essential expenses like entertainment, dining out, subscriptions, memberships, clothing and travel. Budgeting apps can also simplify this task, especially ones that automatically categorize your expenses, which many do.

3. Assign yourself a monthly salary.

Here’s where budgeting begins to really differ for someone with a variable income. Without an employer-assigned monthly salary, you need to assign yourself one as a way to designate the amount of money you want to pay yourself out of your variable income to cover at least your essential monthly bills.

Most budgeting experts recommend that you base your self-assigned salary on your average monthly income because this makes allowances for extremes on either end. Other financial gurus recommend basing your self-assigned salary on your lowest income-earning month so that you know the minimum amount of income you have to work with in any given month.

Ideally, after your self-assigned salary covers your essentials, you still have money to divide between savings and non-essential expenses. For example, let’s say your average monthly income is $6,000, so you choose that as your salary. If your average essential monthly spending is $4,000, that leaves an average of $2,000 per month to either split evenly between savings and non-essentials or to divide up based on budget rules that make sense for you.

In months where your income exceeds your designated salary, begin putting that extra money into a cushion fund to help first cover your essentials and then non-essentials in months where you experience a deficit between your income and salary. When your cushion is sufficiently funded, any excess can go toward other financial goals.

4. Use multiple accounts to manage your funds.

Distributing your income into designated checking and savings accounts keeps funds you want allocated toward one purpose from being used for another. For example, once you deposit your income into your checking account, you could keep the amount of your self-assigned salary in it to pay your essential and non-essential bills. The amount reserved for savings, plus any extra, could be divided appropriately and deposited into multiple savings accounts for purposes like these:

  • A cushion for slow months when your designated salary can’t cover your essential expenses.
  • An emergency fund for true financial crises like a total stoppage in work or a natural disaster that unexpectedly drains your budget.
  • Savings for your financial goals, such as a downpayment on a house or investing for your retirement.

Many budgeting apps let you connect and track all your accounts in one place, making this highly feasible.

5. Try a zero-based budget.

Another good tool you could employ is a zero-based budget in which you allocate every dollar you earn to either an expense item (essential or non-essential) or a particular financial goal. Because you either use the money for a bill or move it to a designated savings or investment account, your budget zeros out at the end of the month like business budgets do.

One of the biggest benefits of using this type of budget on a variable income: It keeps you from spending impulsively in months when you bring in more than your average income because you already have a plan for every dollar.

6. Reassess your budget every few months.

All budgets need to be periodically adjusted based on changes to your income and expenses. This is especially true with a variable income because things change more often for you. Mark your calendar for frequent budget check-ins to stay on track with your financial goals. For example, if your income has risen, adjust your budget allocations so you’re using that extra money to achieve your financial goals rather than falling into lifestyle creep.

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2 months ago

Flexibility is key when your income fluctuates. These tips not only cushion the ups and downs but also pave the way for investing in your career.

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CUNA 2023 Diamond Award Winner

Financial Education

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