How to Budget and Get a Month Ahead with a Variable Income
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Living on a variable income is like living on a roller coaster.
There are highs and lows and it can be hard to predict what’ll happen next. Some months earn more than others, but even on the low months you still must pay the same bills.
Examples of variable income jobs are those that are self-employed, entrepreneurs, commission or tips based jobs, or seasonal work such as construction or teaching.
This can make it a little difficult to budget, but not impossible.
It’s more important than ever to create and live on a budget when you have variable income.
Steps to Budgeting on a Variable Income
1. Start with your lowest income as your baseline
What is the minimum amount of money you have to work with?
You should be able to make this number more flexible as you balance out with a reserve savings.
If you haven’t been living on a budget, you’ll need to start low and work your way up.
2. Determine your essential living expenses
Like you did with your income, determine your baseline for expenses.
You’ll need to be able to cover your basic living expenses on your low months until you have a reserve savings established (discussed in a later step).
These are things like rent/mortgage, food, transportation to and from work, utilities and possibly childcare.
3. Set up automatic payments where possible
At least for your essential items like rent and utilities, try to set up automatic payments.
This will ensure these bills always get paid first and do not get neglected.
If you’re on a low-income month, your credit card, cell phone and TV cannot get paid before rent, utilities and food.
4. Determine flexible expenses
Once you’ve got your necessities covered you can start adding in some discretionary spending depending on what your income will allow.
This will be things like your cell phone, internet, cable or streaming TV service, entertainment, eating out, etc. There can be dozens of these. Don’t allow too many to creep into your budget. If you’re struggling to pay rent, some of these will need to be let go (at least temporarily).
5. Consider budgeting by paycheck
You may find that it is easier to budget by paycheck rather than by the month. This will allow you to keep an eye on things that are coming due before your next paycheck and give you a distinct perspective on paying bills.
A good time to consider budgeting by paycheck is if you don’t get paid on a consistent schedule. If this is the case, you’ll need to put your pay dates on a calendar and make sure you can pay bills coming up before your next payday.
You certainly can continue to budget by month if you are used to it and find it works better for you.
Do what you feel is best for your family and something you can stick to.
6. Use a zero-based budget
A zero-based budget accounts for all your money.
You continue to subtract expenses and savings from your income until you reach zero.
If you’ve paid all your bills and you still have money, give the remailing money an assignment. Your budget isn’t done until every penny is accounted for.
You could put your extra money into your emergency fund, debt payoff, vacation savings, or even fun money. Just make sure you know where it’s going so it doesn’t wander off and get lost.
7. Grow a savings reserve when you have higher paychecks
When your paycheck is more than what you’ve established for your baseline budget, save the extra money and start building a reserve to cover expenses during your lower paycheck months.
This will allow you to add back in some discretionary expenses once you’ve got a cushion to fall back on and be able to pay them on low-income months.
Separate this money into its own account so that it doesn’t mysteriously disappear. Your goal will be to grow this account to where you will be able to live off “old” money that you earned at least a month ago.
You’ll have enough in your savings to cover all current bills and can adjust for the future based on what you’ve currently earned.
I recommend trying Chime. This is a free banking service that you can set up to automatically save a percentage of your income when your paycheck comes in. Another fun feature is rounding your payments and spending up to the nearest dollar and saving the change for you. This is an excellent way to build your savings without you noticing much of a difference.
8. Build an emergency fund
This money also needs to be separate from your regular checking and the savings reserve you’re growing to balance out short months.
Your emergency fund will be for large, unexpected expenses that will inevitably show up at the worst time possible.
Start small, but save a little from each paycheck until you get at least $1,000.
After you reach $1,000 your next goal would be to save enough to cover 3-6 months’ worth of expenses so that you could survive a layoff or major medical emergency.
Tips and Tricks to Get Ahead on Bills
Pay your debts bi-weekly
Paying debts bi-weekly (i.e. every other week) has some great benefits.
It makes it feel like you’re paying a lesser amount by splitting the payment in half and paying every two weeks. It can also allow you to get ahead and pay off the debt sooner.
Obviously, you’ll pay 12 payments every year if you pay monthly, but when you pay bi-weekly you’ll magically add an extra payment and make 13 payments in a year.
This is because you’ll make 26 half payments in a year and therefore 13 full payments.
Tip: Use the calculator in the following article to calculate savings and how much sooner you can pay off your debt. (It can be used for more than just mortgages.)
Related Article: The Simple Trick I Used to Cut 9-Years Off My Mortgage Term
Ultimately you’ll pay off your debt sooner and pay less interest.
Gradually get a month ahead
If you can manage to save a small, extra amount above your bill you can get a month ahead in a short amount of time.
An easy way to do this is to pay a bill in full plus save 25-50% more in your reserve savings account. Build this up over about 2 months.
Do this on one to two bills at a time to keep it manageable. Continue to save until each bill has a months’ worth of money saved.
Let’s say your electric bill is $100.
Pay the $100 bill when it’s due, then save and extra $25-$50 into your reserve savings account. If you can only save $25, try to save another $25 on your very next paycheck.
On the second month, pay your $100 electric bill and repeat saving an extra $25-$50. (And repeat saving an extra $25 on your next paycheck if that’s all you can save.)
In 2 months’ time, you’ll now have $100 in your reserve savings that you’ll use to pay your next bill.
(Essentially you want to be using September’s money to pay October’s bills. October's money to pay November's bills and so on.)
From now on you’ll only need to budget $50/paycheck that you’ll keep in your savings reserve.
Once you’re ahead with money for your electric bill, choose another bill to work on getting ahead.
This will leave breathing room for hard months when your income is lower and still be able to pay your bill and work out a plan for future months.
Pay cash and save money if you’re under budget
Wherever appropriate, switch to paying with cash. I recommend cash for anything you go into a store for including groceries, salons, restaurants or other retailers.
This will draw a hard line in separating your budgets like food, haircuts and clothing budgets.
When you spend cash you’re a lot more likely to stick to your budget. When the cash is gone, it’s gone! You can’t spend anymore.
You may also find you came under budget and have cash left over. This is a good opportunity to add that cash to your savings reserve, your emergency fund, or use it to pay another bill if you came up short.
Earn Extra Income
If your income is severely unpredictable or you need some extra income to get through a slump, try a side job that can help bring in the extra money you need or help pad your account.
Here are a few ideas you can try that are great side hustles:
- Drive for Lyft – This offers a fantastic way to make quick cash and there are typically extra bonuses available to sweeten the deal. They pay weekly, but have a feature that allows for payout on any day you need for a very small fee.
- Become a tutor
- Photography – if you have a knack for taking great photos, try offering a lower priced photo shoot as a freelancer. You can also try selling photos online through stock photo sites.
- Childcare – help watch children in your neighborhood for extra money or swap child care with another parent to reduce the cost of your own child care.
- Walk dogs using Rover
- Freelance work on sites like upwork.com, guru.com or fiverr.com.