Managing a variable income

KJ: If you’re like most Americans, your income is variable (in some form or fashion). Realistically, not all that many people have a fixed income that is unchanged from month-to-month. So, how do you budget or plan for each month when you don’t really know what your income is?

Well, it’s all the more important to make sure you first have an emergency fund that has about 3-6 months of regular living expenses covered in case something happens. Then, consider the following methods for planning:

Prepare your budget for last month’s income
KJ: Look at your income from last month and subtract out your main savings goals (establishing that emergency fund, children’s education, retirement, car purchase, home downpayment, etc.). Use the remainder not used to meet your goals, and set your budget categories for your next month’s expenses. Sure, this method is cumbersome at first, but the more you live with a variable income and the more you consciously watch your expenses, the easier and easier it will be to determine your “baseline” each month for what you spend on food, utilities, etc. This method helps ensure you do still have enough money in your checking account to cover expenses if you’re always simply spending last month’s income.

AJ: This concept is still one I occasionally struggle with. It’s challenging for me to plan month-to-month sometimes when I forget those rare changes in our “everything else” category in months where we have an extra paycheck or an annual insurance payment. I’m a total creature of habit and were it not for our regular check-ins regarding our spending I would surely blow the budget some months. It’s helpful to me to keep a list of how often I purchase certain things or how often some expenses hit. We buy pet food in huge quantities but only buy it about every 2 1/2 months, so it’s important for me to pay attention to when that will hit. Similarly, having an extra paycheck in any given month might distort the amount you think you actually have to spend. Knowing what you made last month will hopefully help keep you on track!

Prepare your budget on a “regular” income
KJ: Although it may be challenging to find what a “regular” income is, this method can be good if your income from month-to-month is really quite variable. You might consider taking an average of your last three months (or six months) of income, subtract out the cash needs for your most important goals, and look at how to spend the rest. The main problem you run into with this method is what happens if the last three months of income aren’t an appropriate expectation for what your next three months of income would be. Not that you can predict the future, but be realistic about what your next months may look like (especially if you are in a cyclical industry with weak income months in the summer and strong months in winter), and don’t just project increase, increase, increase forever into the future.

AJ: Neither Kirby or I have ever held a job that had truly variable income – server, waiter, free lancer/contractor but we could absolutely manage the ebb and flow through tracking and planning. If you are on a fully variable, completely unpredictable earning schedule play it safe and always plan to spend only the lowest amount that you have made in any given month. Over extending yourself in one month means taking especially deep cuts in variable expenses the next month, which is incredibly difficult and often results in people continuing to spend at a normal level without actually recouping some of their savings they took away from.

Experience helps
KJ: The sooner you start planning, and the longer you track, the better you will be at predicting those unexpected expenses, your “regular” expenses/income in a given month, as well as figuring out how to creatively fit the curveball expenses into your ordinary month. The best part of it it all is there are programs like Quicken or that can help you with all of this. There are lots of other tools available too – with many of them free – so find what works for your lifestyle and technological needs and get to tracking!

    Do you have an irregular income?
    What do you do to plan for your income and expenses each month?
    Tell us about what works (or doesn’t work) for you and your family.

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2 thoughts on “Managing a variable income

  1. Good blog. Bob just mentioned yesterday as we were discussing our budget that very shortly our summer bills will be going up…electric for the A/C and water to keep our lovely little lawn and garden doing great…even with the water restrictions already being enforced. These do make expenses variable and can sneak up on folks.

    • That’s an important consideration. Some energy companies allow you to spread your payments evenly across the year. Typically, they take an average of what your prior year’s expenses were, so sometimes you have to have a good history before this can work. Then, at the end of the year, they can apply your overage to next year’s payments (or maybe get a credit) or you may have to pay if your average payments weren’t sufficient. We don’t use that system, since I don’t want to overpay in the first half of the year, when our electric bills are low, but it definitely helps get a more “normal” and even expense structure.

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