Budgeting and living on a variable income can be hard to figure out, but once you do, it’s a breeze. Not knowing week to week what money will be coming can be very stressful. I’ve been there and still have a variable income. It is not as easy as knowing exactly how much you have to play with, but it is doable and if done well, can actually be even better than a regular income.
There are many articles out there about how to do it and different advice. Since a budget is basically working out your income vs expenses and making sure you are spending less than you earn, your first point is to work out your income. Here are two options to base your expected income on:
Average income: This is where you look at your income for the past 12 months if possible and average it out. This can be a good idea, but there are many issues with this such as those months your income is less than your assumed average, or if your income actually decreases this year so your average is less, but your budgeted for a higher income. That is a recipe for disaster. JD Roth explained it really well here.
Lowest income: This is my preferred method. Find the lowest monthly income you had last year and base your income on that. I actually like to base my income on 10% less than that because this allows for an automatic 10% savings I don’t even need to budget in because I work off the lower amount for the rest of the budget.
This can be very hard to do if you are just getting started. When I first started this way I flipped it – I worked out the bare minimum I needed to live off after working out my expenses then aimed to make more than that every month. Some months my expenses were lower but I put the extra amount I had budgeted for into my overflow fund. For example, month 1 I only spent $2,500 but my budget was $3,000 a month. The $500 difference went into an overflow fund. Month 2 my expenses were $3,250, so $250 came out of the overflow. Month 3 I spent $3,150 but month 4 only $2,800 for expenses. As you can see, each month was variable, but having $3,000 as my monthly average and keeping the overflow account meant I was covered each month. If my expenses were less, I did not allow myself to spend up to my allocated amount.
On top of the overflow fund, any extra I made over the $3,000 budgeted, went straight into an emergency fund to build $1,000, then once that was established I split the extra into growing a bigger emergency fund and savings. After the first year I had a good idea of what my income was, my expenses, my messy areas (the bad habits I needed to break and areas I could afford to cut back in OR areas I did not budget enough for).
Now you have an amount to work off, it makes things easier. The next step is to work out your expenses.
1.) Gather all bills: Electricity, water, gas, rent/mortgage, rates, car insurance, home and contents insurance, health insurance, life insurance, school fees, phone, internet, mobile, car registration etc. (Check out how I saved $1,700 on insurance)
2.) Write when things are due on the calendar: Most of the bills just listed come monthly, quarterly or annually. Check their dates to see when they were due last year and write them on a calendar the month they are due in BIG, BOLD writing so as you go through the year you can see at a glance what bills are due each month and there are no surprises.
3.) List ALL other expenses: You have bills covered, but what about all the other expenses like groceries, car maintenance, home maintenance, beauty such as waxing or haircuts and colours, petrol, clothing, presents, entertainment, parties, replacing items (you should have an account set aside for replacements. Everything such as washing machines, dryers, fridges and furniture is only designed to last so long and they are not cheap to replace.) List every single expense you have and how much it costs a year.
4.) Track your spending: As you do this, track your spending for the next few months. It will give you a good idea of where you money is really going, any leaks you might be able to stop and areas you can cut back in.
Now you have a good idea of your expenses and income. So how can you manage to live with this budget and implement it properly? What tips make it easier?
1.) Pay yourself a wage: This is crucial. I mentioned the $3,000 amount earlier. That was just a number I selected for the article. If you know your baseline expenses, pay yourself enough to cover that, plus the 10% into savings I mentioned and sock the rest away. Keep it regular and live as if the rest of the money wasn’t coming in, only the wage you pay yourself.
2.) Keep sanity money: When calculating expenses many people cut out sanity money. This is a huge mistake. It is human nature to want to treat ourselves and many end up swinging to the other extreme when they cut out all fun. They end up spending more on themselves, the exact opposite of what they were trying to accomplish. Keep some sanity money for yourself in your budget.
3.) Live frugally: Establish a frugal mindset. It is not about depriving yourself, it is about not giving in and living the consumerism lifestyle. Work out your values, what things are important to you in life and a frugal lifestyle is much easier. When you know what you want, where you are heading, have goals and are working towards them, it is much easier to stop buying stuff and to live within your means.
4.) Always pay into savings: Every time you earn money pay yourself first! I read The Richest Man in Babylon — Six Laws of Wealth as a teen and it is still one of my favourite money books ever. Pay yourself first, pay 10% at least right into savings and let it build up. It is not to be used for a new car or as an emergency fund. It is your savings for the future, to buy a house or invest. Treat savings like a bill you need to pay.
5.) Don’t be tempted in good months: If your income is variable, there will be months that are above what you have based your budget on. Don’t be tempted to blow the extra cash on stuff you want. Stick to your lifestyle
6.) Where can you cut back? Groceries are often the first thing people think of, but there are so many areas you can make changes in to reduce your expenses. I did a 30 day money makeover sharing ways to make and save money in every area of your budget.
7.) Establish an overflow fund: It can take a little time to set up, but it’s really important because it stops you dipping into your real savings.
8.) Establish an emergency fund: Again, another important thing to protect your savings. An emergency fund is only for those unexpected expenses such as car repairs or when you need to claim insurance but have to pay your bit first. Not just because you didn’t budget for the electricity bill. Learn to budget and use the emergency fund for real emergencies.
9.) Live based on last month: This means, get your finances in order so that you are living off last months income, instead of what you expect to earn this month. Last month’s income is guaranteed because you already made it, this months income is variable. It takes a little getting used to and to get to the point where you are living that way, but it takes a lot of the pressure off once you do.
10.) Create extra sources of income: There are so many ways to make money that you needn’t rely on just one source of income, in fact you shouldn’t. Look at other ways to make money and see which ones you can incorporate into your life. I have mentioned before top ways I have made money, also various ways you can make money are all over the site.
11.) Ensure you get all benefits: Depending on your income and status (married/kids/single/senior citizen etc) there are a lot of benefits, discounts and options out there. Check to make sure you are getting everything that might help you. Here are some for low income/single parent families.
12.) Pay ahead: Not everyone is great at putting aside money for the bills as they need. If you can keep a high interest saving account for bills it’s best, but otherwise pay ahead in your bills. Pay some each time you get paid, then when the bills come in they are either already paid or you will have a minimal amount owing.
13.) Pay annual bills from lump sums: If breaking the large annual bills down into small payments each month is difficult, you can look at paying them in a lump sum each year with any lump sums you might receive. If you live in Australia and have children, there are the Family Tax Benefits, the extra $700 (approx) per child paid at tax time. I know some people who use this to pay annual bills. I am not a fan of this method for numerous reasons – what if you have a tax debt? It is not actually learning to live within a budget, instead you are relying on a large sum to pay the large bills. If you do it one year to get started, then budget the annual bills in for the following year after they are paid this year, as a once off type thing, that is ok, but try not to rely on lump sums to pay annual bills.
How to kick start it
“Oh, yeah, this is all great, but what if we are already living in the lean months and have no savings/overflow fund or anything? How am I supposed to create this magical budget and stick to it when I am already behind the eight ball?”
I know this feeling, believe me. When I was married there were times my ex husband was out of work. There were times I was injured severely which meant I was bedridden and couldn’t do all my usual frugal stuff. My ex husband worked casual at some points, I owned different businesses at different times. When we got married we had debt, irregular incomes and it was hard. But it is doable.
1.) Find extra money: Sell your stuff, do some mystery shopping or online surveys, have a garage sale, do some babysitting/lawn mowing/cleaning/ironing/anything to bring in some extra cash and help establish an overflow fund or even get you on level.
2.) Have a no spend month or even just a week: This doesn’t help with tracking your spending to see your real expenses, but it does help you ease the budget a little in a short space of time. This is not sustainable long term for most people, but many find after a month of no spending, they have less of a desire to spend so it does help.
3.) Get freebies: Look around to see what you can source for free and stash the money you would otherwise have spent. Can you barter anything? Enter competitions and giveaways, what samples can you source?
4.) Break it into bite size pieces: Don’t try to tackle everything at once. If you have debts, look at which ones you can knock over quickly. If you know you can cut back in different areas of your life, start with one and build on that as the changes become habits. Trying to do a complete overhaul all at once is often a recipe for disaster.
Do you live on a variable income? What are your tips?