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How to Budget When Your Income Fluctuates

May 9, 2024 6 min

One of the most difficult budgeting situations is for families and couples with income that fluctuates, including people with commission sales, the self-employed, or business owners.

When you receive a regular paycheck, it’s easier to create – and stick to – a budget. You can spend money as it comes in. But when your income varies every month, you can run into problems.

When you have a high-income month, there’s enough money for everything you need. But during less productive months, you can run into major problems.

People with fluctuating incomes need budgets – even more than people on fixed salaries. Many people on variable incomes get trapped into debt because they borrow during lean months and spend what they make during high-income months, instead of saving for leaner months.

Here are the steps you can take to keep things in better order if this is your situation.

Identify monthly expenses

Before you can start budgeting, you need to examine what your regular expenses are.

Here are the most popular categories:

  • Housing
  • Transportation
  • Insurance
  • Childcare
  • Utilities and other bills
  • Debt payments
  • Groceries
  • Entertainment (including streaming services)
  • Gifts and charitable contributions
  • Travel

You can use a pen and paper or a spreadsheet, which can make it easier to add up your monthly costs. Make sure to actually use the real figures – don’t estimate these numbers. You can review your bank or credit card statements from the past few months to get a realistic average.

Once you have all the categories, add up the figures to get the total average amount spent per month.

Estimate average annual income

An easy way to find your average annual income is to use data from your most recent tax return. However, that can also be out of date if you’ve changed jobs since then, or if your income has changed.

If you use bookkeeping software or spreadsheet to track your income, find your income from the past 12 months. Then, divide that figure by 12 to find your average monthly income.

That figure is what you can use to develop your monthly budget. If one of the months you had was a high outlier, you can decide to exclude that just to be as realistic as possible.

Set income funds aside

When you receive your income, deposit the entire amount into a savings account each month.

If you already have some savings, keep it in this savings account because it will help serve as a buffer for leaner months – even $1,000 can make a big difference and help you cover expenses as usual.

Tips & Facts

What to do with a high-income month

If there is money left over from a high-earning month, leave it in your savings account instead of spending it. Over time, this will build your buffer, which you’ll need during lean months.

Withdraw budgeted income appropriately

Once a month, transfer only your needed monthly income from your savings account into your checking account. For example, if your monthly expenses are $4,800 per month, you could set up an automatic transfer from your savings account (where your income is deposited) into your checking account each month.

If you have some bills that are relatively similar each month (such as your car insurance, cell phone bill, and water bill), you may also consider using a separate account (other than your checking account) to hold these funds. That way, when these bills come due, you always have the money to pay them.

For example, if your utility bills and cell phone bill total around $300 each month, you might set up an automatic transfer of $300 each month to a savings account, while the rest of your monthly expenses – which now total $4,500 after deducting the $300 – go into your checking account.

Here’s how a sample month might look:

INCOME $4,952 deposit to money market account
MONTHLY COSTS $4,500 transfer to checking account
MONTHLY BILLS $300 transfer to primary savings account

In the example above, you’d have an additional $152 in your money market account for this month ($4,952 minus $4,500 minus $300). As a reminder, leave this money in your savings account and resist the urge to spend it. It will serve as a buffer during the lean months.

If there is still money there at the end of the year, you can distribute it to another savings account, like one dedicated to your emergency fund, or make an extra contribution to your retirement account.

Delay funding some expenses

If you have a low-income month – or several in a row – see if you can avoid paying for something that’s not necessary.

For example, you can often delay some expenses, such as clothing, saving for a vacation, or gifts. You can fund these later when there’s more income.

Don’t forget payroll taxes

The self-employed need to be extra cautious when developing a budget, because they need to set funds aside for taxes. Every month, they should take a percentage of their earnings and put it in a separate savings account. Then, when it’s time to pay their quarterly estimated taxes, the money will be easily available.

Failure to save for quarterly taxes can wreak havoc on a budget and make it harder to manage your finances. And if you don’t pay your quarterly taxes, you’ll likely have a huge tax bill at the end of the year.

Keep business expenses separate

When you’re self-employed, it’s crucial to separate your personal expenses from your business-related expenses, such as travel, car maintenance, or meals from household expenses.

If you can, you should open separate checking accounts and separate credit cards to use only for business expenses. This will also simplify the tax filing process.


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