One of the scariest things about leaving my job to run my own business was learning how to budget when your income fluctuates.
Having a steady income that comes in every two weeks like clockwork makes it easy to set up a budget. You know exactly how much money you’ll earn, when you’ll get paid and how you need to spend it according to your budget.
But when your income fluctuates from month to month because you are self-employed, or you have a commission-based job, it can be more difficult to budget. Notice however that I did not say it’s impossible to budget when your income fluctuates. Because it’s not. Here’s how you can budget when your income fluctuates.
Record All Monthly Expenses
Recording all of your monthly expenses is the first step in any budget, no matter if your income fluctuates or is steady from month to month. Start with the necessities such as your rent or house payment, utilities, loans and debt payments, groceries, etc. Once this is completed be sure to include additional expenses such as clothes, eating out, trips, etc.
Note which expenses are monthly and which are weekly. Once tallied subtract these from your current income. This is how much you have left or how much you need to make up. From here you can decide what can go and what stays in your monthly budget.
Average Your Lowest Income
This sounds simple, but when your income fluctuates, it can be more tricky. The hardest part about a fluctuating income is having low months. So when you budget, make sure you aren’t budgeting off of a high income month.
Take a few of the months where you have made the least and average it out. This will the basis for your bare-bones budget, the lowest you have to have to live off of. This way you’ll be able to cover you budgeted expenses as long as your income doesn’t drop below the current low average.
If your income doesn’t fluctuate too severely, or your income is continually growing, you might be able create a rolling 12 month average to use for your budget instead. But, there is more risk in using this method.
Open a Holding Account
This budgeting method is great for those who don’t earn the same amount all year and have known periods when work and income may be slow. Open a new account and deposit all of your income into it each month. Then take a set amount from the account each month to cover the budget you created. Don’t take more when you have a good month so you aren’t tempted to spend it or splurge.
If you continue to out-earn your monthly pull, or you no longer have a slow season, you may be able to use the “extra” in the account to make a lump sum payment toward debt, or as a savings for a large purchase, like car or a down payment on a house.
Start an Emergency Fund
Everyone should have an emergency fund, no matter how much money they have or earn. By saving three to six months of expenses, you can use this to live off of should the unexpected happen or if an emergency pops up. Work your way up to this amount by putting money into your emergency fund every month. Add a line item into your budget for saving so you don’t forget to do it.
Stick to Your Budget!
This is the most important thing to do when your income fluctuates. Stay within your budget even if you happen to have a good month of income. Without splurging during high income months, you will continue to have savings and money for when things get slow. Be wary of elevating your lifestyle based on a month of inflated income. This can be unsustainable if you don’t earn the same the next month.
You can make your budget work even though your income may fluctuate from month to month. By planning ahead and sticking with it, you can meet your financial goals and be set for whatever comes your way.
Does your income fluctuate? How do you handle budgeting with a fluctuating income?
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