Some of us are lucky in that we know exactly how much will hit our accounts when we receive our pay checks. 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.
Others, however, must budget on a variable income. People who work solely or partly on commission, hourly workers without a set number of hours at work, freelancers, business owners, and short-term contract workers can all struggle with this problem. Working with a variable income makes it extremely difficult to predict how much money will be coming in during a given month and therefore, how to budget accordingly.
One thing’s 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. You can average that out to figure up about what you make on a monthly basis.
Then, list all your monthly expenses, just like you would on a regular budget. To make sure you can meet all your expenses, 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. The top priorities on your list are what you’ll pay when you’re on a tight month. In other words, no matter how much or how little you take home, these bills must be paid.
Additionally, this list 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’re wise, you’ll cut back on such things for the foreseeable future until you are confident you have enough saved to resume spending on less necessary things.
After you list all of priority items, you must factor in savings, ideally 10%.
Although you will be tempted to spend the extra money you 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 you have 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’s 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, but learning to delay purchases until after you’ve saved will keep you thriving on your variable income.Topics: Personal Finance