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How I budget with variable income

By Taylor Medine

December 2021
A budget  it’s something that we’re fully aware we need, but creating one when your income can change from one month to the next can feel practically impossible.

Even for me, someone who writes about personal finance for a living, budgeting with a variable income stressed me out…for years. When I worked a full-time job with a set income, budgeting was a breeze, but coming up with a plan became difficult when I quit to freelance full time.

If you’re working in the gig economy or you run your own business, budgeting to pay off debt, save, or invest might be trickier – but it is doable. Using the 50/30/20 budgeting method and tips from the business book Profit First by Mike Michalowicz, I was able to create a workable budget, even as a freelancer with irregular income.

First, a little bit about the budgeting method

The 50/30/20 budgeting method is a guideline that says you should spend 50% on needs, 30% on wants, and 20% on saving and debt repayment. I find that thinking about my budget this way versus budgeting for each individual line item (i.e., cell phone service, food, Netflix, etc.) is easier to manage with a variable income. You’ll find out how in a second.

For business owners and independent contractors, the book Profit First also gives a unique perspective on how to think about the money you earn. Instead of spending freely as money comes, you allocate money to taxes, profit, and your pay first. Then the rest can go to business expenses. This method is to help ensure you get paid, your goals get met, and business expenses stay manageable. 

Using these two strategies, I fashioned a budget by coming up with percentages that I would allocate to each area of my budget  taxes, profit, personal expenses, savings/debt, and business expenses. 

These numbers are always changing, but here’s my most current breakdown:

  • 40% Taxes
  • 10% Business profit
  • 5% Business expenses 
  • 20% Savings and debt
  • 25% Personal and joint bills with my partner

Each time I get paid, I divide the cash up according to these percentages, no matter how small or large the payment is. This helps me balance out the feasts and famines in business; instead of going on a shopping spree with a big check, I’m always setting aside money for expenses and other goals.

Now that you have some background, here’s how to put this into practice:

#1: Add up your monthly expenses

First, write down essential expenses. These are essential costs that you can’t avoid during the month because they’re the most basic, such as food, utilities, and rent or your mortgage.

Next, write down your non-essential expenses for things you enjoy, like going to dinner with friends on Saturdays or getting your hair cut every few weeks. I’m a firm believer that people should have fun, and non-essentials deserve a place in your budget. 

If you’re too strict and only budget for essentials, it’s easy to splurge when you start feeling FOMO (fear of missing out). Budget for fun regularly, and this whole process won’t feel like a punishment. 

#2: Write down your money goals

Next on the to-do list is writing down how much you want to save, invest, or put toward extra debt payments each month. If you’re thinking about buying a house, a savings goal for a down payment would fall into this category. If you need help estimating how much you might need for a down payment, check out this down payment calculator.  

If you’re not sure how much you can afford to put here, don’t worry – estimate for now. In the following steps, you can tweak these numbers. When you figure out how much you want to allocate to each money goal, add it all up.

#3: Account for business expenses and taxes

If you run a business, write down and add up your business expenses. Then figure out how much you want to set aside for taxes. A tax professional could help you determine how much, but I currently put away 30% to 40% of each payment I receive.

#4: Write down your average monthly earnings

Finally, estimate how much you bring in each month. You could do this by taking the gross income you made last tax year and dividing by 12 or looking at earnings from the previous three to six months and taking that average.

#5: Calculate percentages (here’s where things get fun)

The final step is calculating your expenses and goals as a percentage of your average income. 

For example, take your total monthly living expenses, divide that number by your income, and multiply by 100. Say you earn $6,000 per month and your personal expenses are $3,500 per month. That would take up about 58% of your budget. If your savings and debt repayment goals are $1,150 in total each month, that would take up about 20% of your budget.

I currently have 5 budget categories – taxes, business profit, business expenses, savings and debt goals, and personal/joint expenses with my partner. Your categories could be different, and you could even break up your personal expenses into 2 categories for needs and wants. 

When you first calculate this, you might realize that your budget doesn’t work out to an even 100%. No problem – you could adjust the numbers by reducing expenses or taking money from one category to put in another.

Putting the budget into practice

The beauty of this budget is that you don’t need spreadsheets if you prefer not to use them (I don’t!). Each time you get paid, you can break up the money you receive into budget percentages you create. One way to do this is by putting cash in different envelopes. 

I have different bank accounts for business, personal, and joint expenses. When I receive a payment, I check my percentages and distribute the money. Most bills get paid automatically from checking accounts where I transfer money for bills. At the end of the month, I’ll take from the goals account to invest money or pay down debt. 

If you’re trying to save up to buy a house, having a money plan can put your goal within reach. Budgeting is a little different when income is less unpredictable, but you can still get your financial life together, and the strategy above could help.

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Taylor Medine is a personal finance writer who has covered money topics for various media outlets over the past 7 years. Her work has been published on USA Today, Business Insider, MSN, Yahoo! and more. When she’s not writing, you’ll likely find her attempting (and possibly failing at) a new recipe or chasing after her 1-year-old daughter, Elise.
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