How do I budget if my income changes each month?

Hey reader,

While most of my followers are teachers, there are quite a few of you in other careers who follow along to get money advice as well, and one of the most common questions I get is how to budget with a variable income.

This is a big obstacle to contractors, freelancers, small business owners, and creatives, many of whom have the limiting belief that it’s impossible to budget with an income that changes form month to month.

Not only is this not at all the reality, but it’s a dangerous belief. This is because not only is it possible to budget with a variable income, but it’s arguably more important. With a consistent income, it’s a lot simpler to internalize your spending caps in each category and make things work (albeit not optimally) even without tracking your spending closely. With a variable income, however, your categories are constantly changing and in need of evaluation. Obviously, I never recommend flying blindly like this, but with a variable income, it has the possibility to be much more disastrous.

So, how can you budget if your income is always different? There are two complementary ways to make this work as smoothly as possible. 

The first thing you need to do is determine a low estimate for your income. My suggestion is to look back at the last 6-12 months of income and create a budget for the lowest amount you ever earned in those months. 

Obviously, there are factors that complicate this:  if your income is seasonal, for instance, you’ll have to work by averaging out the seasonal income over the entire year. So, if you make $60,000 all in the Spring season, you need to ration it out to make it last until the next Spring. But for most people with variable income, it just takes looking at your lowest income over 6-12 months.

Then, when you earn income above the lowest amount, it can go towards your bigger goals: savings, debt repayment, and/or investing. If your income is highly volatile, a fully funded emergency fund should be your primary goal to work toward before focussing on debt or investing. This will prevent you from going into further debt should your income suddenly tank.

Now, there’s a higher level of budgeting for a variable income that will really improve your financial security, but will take some time to reach. This level is all about funding your life in the current month off of the previous month’s income.  Again, don’t start here, start by budgeting based on the lowest income you earned in the past 6-12 months. But getting to this place is a highly recommendable goal. So, how does it work?

You want to start by opening a separate checking or savings account than the one you link to your debit card and use to pay your bills. This new account should be in your same bank to make transfers easy. You can call this account “last month’s income” or “buffer.”

You should work, over time, to build this up to the minimum amount of income you typically earn in a month. Then, you can start transferring the total amount into your regular checking account at the beginning of each month. Next to your emergency fund, completing this account should be your second priority. 

The magic of living off of this account is that it’s essentially the same thing as having a one-month emergency fund. This is crucial for variable income earners in addition to a regular emergency fund, because it provides the wiggle room they need for when some months bring in less income than others. It also means you don’t have to time your bills and savings with each and every paycheck you earn. Instead, you can pay them right away at the beginning of the month.

Then, when you earn income in a month, it will go right into your buffer account, waiting to be used in the next month. And any money you earn in a month above the minimum amount can go toward other goals in the following month, and so on and so forth.

It’s definitely a next-level money move, but a seriously wise one for those of you who have to work with a constantly-changing income.

🙂 Rachel

P.S. Don’t forget that I made a resource for working on your money mindset and outlining budgeting basics as you walk through this journey.

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