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Some of us are lucky in that we know exactly how much will hit our banking account when we receive our pay check. Although we may not realize or recognize it, living on a fixed salary makes it extremely easy to budget and plan, especially when we feel we have job security and can rely on our income for an extended period of time. There are others, however, that must budget on a variable income. This includes people who may work solely on commission or have been hired for a short term employment contract or may include those of us who are not guaranteed a certain amount of hours at work. As a result of having a variable income, it is extremely difficult to predict how much money will be coming in during a given month and therefore, how to budget accordingly.
One thing is for certain, the months that you consider to be “good months” in terms of income are months during which you should save a large percentage of your income. This will come in handy when you have a month of low income. We’ll get to this a bit more shortly.
First, it helps to see what you have brought home over the past year on your variable income. The best way to budget on a variable income is to list all your expenses on a monthly basis, just as you would if you were living with a known monthly salary. You also need to prioritize the items on your budget. For instance, there are certain expenses that cannot be avoided such as mortgage payments, utility bills, health insurance, credit card payments, etc. These must be a priority. This list can be looked at as your budget for your leanest month. In other words, no matter how much or how little you take home, these bills must be paid.
Additionally, it will give you a general idea of what you need to shoot for in terms of take home pay every month just to survive. Completing this exercise will enable you to see a few areas where you are overspending or spending on things that are unimportant to you. If you are wise, you will cut back on such things for the foreseeable future until you are confident you have enough saved to resume spending on more unnecessary things.
After you list all of the priority items, you must factor in savings, ideally 10%. Although you will be tempted to spend the extra money you may have in your account after the basics have been met, resist that temptation and save, save, save. You may very well need to draw on this money when your variable income dips in the coming months. Ideally, you should be able to create at least a one month, if not more, emergency fund. Even if the savings account begins to grow, continue to sweep the allotted 10% into the account. If you find that there is a great deal in savings, you may even want to consider contributing to a retirement account, if it is not available to you through other avenues.
What is left after the basics and savings have been satisfied is “pie in the sky.” This can be money that you spend the way you see fit whether it be a gym membership, a special outfit or a home remodeling project.
Living on a variable income is certainly not easy from a budgeting standpoint. It requires pragmatism and someone who is not a spendthrift and can realize that short-term gratification from a purchase may come to hurt you in the long run when your variable income is not enough to survive.
Published or updated February 14, 2011.
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The variable incomes are always unreliable. Till the facility of a stable income happens the tips told in the blog must be followed to its nearest possibility. Thanks for the mention.