How to Budget with a Variable Income

It can be difficult to know how to budget with an irregular income. Budgeting with a variable income is a problem that many people have, and I don’t think it’s covered adequately in most personal finance books. The headache that comes with trying to budget when you don’t know what your monthly income is going to be is the single biggest reason I’ve failed at keeping a budget over the years.

My husband has worked in various commissioned sales positions for most of our 12 years of marriage, so I’m not new to dealing with irregular income. Freelancers and those who are paid by the hour also have income that can vary widely from month to month.

One of the biggest downfalls of having a variable income is the tendency to overspend on good months. Believe me, I understand. Your money is stretched to the limits in the lean months, so on a good month, you’re tempted to spend a little bit more on fun stuff. But when the next lean month comes, there’s no extra money left to help ride it out.

Keeping a budget is the best way to even out the highs and lows of a variable income. Though it’s true that budgeting is more complicated when you don’t have a steady income, it is possible to make and keep a good budget. And I’m going to show you how.

1. Create a Standard Budget

Previously, I showed you the steps to creating a budget. You are going to follow the same steps, so you might want to review that post. I’m also going to add a few steps.

2. Estimate Your Monthly Income

  • Self-Employed or Business Income – If you’ve been working with an irregular income for a long time, take last year’s income and divide it by 12. If last year was a typical year, that is a pretty good estimate of how much you’ll have to work with on a monthly basis. If you had a great year last year, cut the number down to what is typical for you. It’s much easier to adjust your income up after you’ve started your budget than to continue cutting expenses.
  • Salary Plus Commission – If you work on base salary plus commission, see if you can live on just your base salary. Any commission can be used for paying down debt, saving for a house, or whatever you please.
  • New Job – If you’re new on your job, your employer probably told you what a typical first year salary is. Estimate your income lower than that. It’s been my experience that new employers are a little bit too optimistic on your initial earning potential. If you end up making as much as your employer said you’d make, you’re money ahead.

3. Plug in the Numbers

Now that you’ve estimated your monthly income, use that number to budget. Follow the steps in my post How To Make a Budget That Works, until you have a good budget.

Be sure to fight the temptation to adjust your monthly income upward, because you’re having trouble making the budget work. That’s setting yourself up for failure. Keep cutting expenses until the numbers work.

4. Set up Two Bank Accounts System

  • Variable Income Account – The first bank account should be with a good bank that pays a decent interest rate (I recommend CapitalOne’s 360). You may as well earn interest on your money. When you get paid from your employer or your clients, deposit the money directly into your savings account. You are going to pay yourself out of this account.
  • “Paycheck” Account – Decide whether you want to receive a “paycheck” once or twice a month. I prefer twice. On the first and the fifteenth of every month, transfer 1/2 of your estimated monthly income to your regular bank account. Even if you made more money that month, transfer only that amount.

What you are doing is giving yourself a regular salary. On months that you make more than your “salary”, you will be leaving the extra money in the savings account. On months where you make less, you will use the extra money from the good months to cover the difference.

At the end of the year, if you have a lot of extra money in your savings, you can give yourself a small raise for the next year. If you’re consistently finding that you don’t have enough money in your savings account, you may have to give yourself a pay cut.

This method can take six months to a year to start really working correctly. You will have to make adjustments, but stick with it as best as you can. Eventually your budget will work the way it’s supposed to, and you can say goodbye to the roller coaster that comes with a variable income.

Don’t miss the other posts in this series!

Have you successfully used a budget with a variable income? How did you do it?

13 thoughts on “How to Budget with a Variable Income”

  1. I like the idea of the two bank accounts and paying yourself a salary into the second account. I also liked that you mentioned that it takes months to start working well. Too many people get discouraged after the first month or two. I recently wrote a post about budgeting on a variable income that can provide additional information on the subject.

  2. Brilliant! I am starting this plan today. Before I went back to college, I’d always had salaried jobs. Now I’m a nurse, and although I make much more on the hour, I’m really struggling with the variable income. You plan seems simple and effective. Thanks.

  3. This is just brilliant. I know this is coming almost a year later, but I just had to say it out loud! I will be showing this to my husband. Thanks for writing this.

  4. Great post. We have been doing something similar with my income, which is also irregular. One additional thought: we reserve for the bigger expenses that come up only once or twice a year, such as homeowners’/auto insurance and property taxes. This could be done either out of the suggested “salary” or separately — but the process is similar. Calculate the total of these big expenses and divide by 12 or 24, depending on how often you want to contribute toward the reserve.

  5. I completely agree with all of this! I’d really love to find a good personal finance book geared towards the self-employed (or others with variable income). I’m sure some exist, but I’ve just not found them.

    The other thing to consider in this situation is the emergency fund. I sometimes have 1-2 month dry spells, and the only reason I don’t live off my credit card is because I plan for this. My emergency fund is always higher than the often recommended $1k, even though I’m paying down debt. (I wrote about this in December.) I know I could be paying my debt down quicker, but the peace of mind and liquidity in lean times is worth the tradeoff, for me.

  6. @Kris – Health insurance is a sore subject with me right now. I can’t get approved for private insurance, because I get migraines. Nevermind that I treat them with over the counter meds, but whatever.

    We’re going to be getting insurance through my husband’s job pretty soon. It’s really expensive, and it’s medical only (no dental), but it’s better than nothing.

    My suggestion would be to find a reputable insurance agent in your area and see what your options are. I was working with a pretty good agent, and I’m sure she would have come up with something for me, had my husband not found a job with insurance.

    Best wishes, and if you come up with some interesting solutions, let me know. Insurance is a headache.

  7. These are all good ideas, Lynnae. I’m a freelancer, and it’s getting more and more difficult to find consistent work. I’d love to know if you have any thoughts and/or a plan for health insurance, too.

  8. @heather – if you try it, let me know how it goes!

    @Lee – the hardest part is definitely getting started. If I were you, I’d probably focus on getting current with your bills first. Once you’re current, then live on the smallest budget that you can for a few months, to give yourself some time to accumulate a little extra.

    It’s easier said than done for sure. And there are going to be times when you just have to trust God, and it sounds like that’s where you’re at right now. So deal with the immediate, and make this your long term goal.

  9. What a great article, Lynnae! It sounds good to put all of your income into two accounts and draw a set salary from them. I would run into a problem into waiting until enough is in the account to draw from, because we’ve got bills already past due, and I don’t want anything disconnected or repossessed! Also, we have to get a tax payment together this month. (1200:(

    I just now tried to crunch some numbers and feel like pulling my hair out! I know this budget is the way to go, because it takes a variable income into account, but how do I get started when we’re impatiently waiting for enough to come in and then rushing to pay whatever urgent bill is pending? I know we must trust God…and He always does take care of us (I really sound full of faith, don’t I? Sorry.), but I’m having a hard time being organized about it all, when I can’t seem to work it out ahead of time.

    On a positive note, though…my husband just started an extra job that will bring in 2100. in a couple of weeks. Now, if I could just get the numbers straight and not spend too much from the regular income…we’ll be all right.

  10. Farming is either as most say feast or famine. It is easiest to go back and divide last year’s tax numbers by 12. Thanks for posting this!

  11. Wow! Thank you. You know we have read quite a few budgeting and money books and this is the first time anyone has suggested this. We may well be able to manage that. We have one fixed income and a variety of non-fixed. Up until now we used the fixed for paying bills etc and the other for extras and kept a nice cushion in the bank for overflow. I mentioned this to my husband who makes the financial decisions and since he now has a fourth non-fixed income that will be coming in soon we may well try this.


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