Budgeting can be difficult when your income is variable and unpredictable. This is frequently the case for business owners and commission-based professionals. I frequently get questions from clients in these scenarios on how to properly budget. In my opinion, the best strategy for these individuals is to first figure out what your expenses are and choose a budgeting strategy from there. See article “How to Budget and Different Strategies to Consider" article for information on how to do that.
After determining expenses and choosing a budget strategy, it can be difficult to properly budget each month on a variable income. Here’s what I recommend doing to combat this:
Set up a “pay” account to use for variable income months. As someone with variable compensation, you will have months where income is significantly higher and months where income is significantly lower.
Let’s say you determine that your monthly expenses (including savings) are $6,000/month. In month’s where your income is greater than your expenses, you will allocate the extra cash towards your “pay” account. In month’s where your income is less than expenses, you will take the extra needed to meet expenses from the “pay” account.
Here’s an example:
As stated, you’ve determined your expenses are $6,000/month (including savings).
In January, you take home $10,000 in income. So, you should allocate $6,000 towards expenses. Then, the remaining $4,000 should go into your “pay” account.
In February, you take home $3,000 in income. So, you should allocate your entire $3,000 of income towards expenses. Then, the remaining $3,000 needed to meet expenses should be taken from your “pay” account.
This way, you always have enough cash to meet expenses and can budget from month to month. In high income months, extra income is added to the “pay” account. In low-income months, the extra cash needed to meet expenses is taken from the “pay” account to cover those expenses.
I’ve seen this work well for individuals with variable income. In my opinion, this strategy significantly relieves stress for variable income earners so that they can properly manage their money and unpredictable income. Read my article “How to Budget and Different Strategies to Consider" for a deeper dive into developing a budget strategy.
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