As the old saying goes, “the only constant in life is change.” This is especially true when it comes to our incomes. While some people have a steady and predictable salary, others have variable incomes that fluctuate month to month or even week to week. For these individuals, budgeting can be a challenging task. How do you plan for expenses when you don’t know exactly how much money you will be bringing in? In this blog post, we will explore the concept of variable incomes and discuss the importance of budgeting for them. We will also provide tips and strategies for creating a flexible budget that can accommodate fluctuating incomes.
Understanding Variable Incomes
A variable income is an income that varies from month to month or year to year. This can include freelance work, commission-based jobs, seasonal employment, and even investments. Unlike a fixed salary, there is no guarantee of a set amount of money coming in each month. This can make budgeting a difficult task, as there is no stable income to base your budget on.
One of the main challenges with variable incomes is the uncertainty and lack of consistency. This can lead to financial stress and difficulty in managing expenses. It can also make it difficult to achieve financial goals and save money for the future. To effectively budget for variable incomes, it is essential to understand their nature and plan accordingly.
Types of Variable Incomes
Let’s take a closer look at some common types of variable incomes:
Freelance Work
Freelance work refers to self-employed individuals who work on a project basis rather than being employed by a company. This type of work can vary greatly in terms of income, as clients may not always have projects available or may pay at different rates. Freelancers typically have to constantly seek out new opportunities, which can result in fluctuating incomes.
Commission-Based Jobs
Commission-based jobs are those where an individual earns a percentage of the sales they make. This can include careers such as real estate agents, insurance salespeople, and car salesmen. The amount of income earned in these roles can vary greatly depending on the market and the number of sales made.
Seasonal Employment
Seasonal employment refers to jobs that are only available during certain times of the year. This can include holiday retail positions, summer jobs at amusement parks or beach resorts, and tax preparation services during tax season. These types of jobs can provide a steady income during their respective seasons but may result in little to no income during other times of the year.
Investments
Investments can also be considered as a type of variable income. For example, if you receive dividends from stocks, the amount may vary each time dividends are paid out. Similarly, rental properties can provide a variable income depending on occupancy rates and maintenance expenses.
Pros and Cons of Variable Incomes
Variable incomes have both advantages and disadvantages. Let’s take a look at some of them:
Pros:
- Potential for high income: Variable incomes often have the potential to earn more than a fixed salary, especially in commission-based jobs or freelance work.
- Flexible schedule: Many variable income jobs offer a flexible schedule, allowing individuals to work when it suits them.
- Opportunity for growth: With variable incomes, there is often room for growth and increased earning potential. This can be achieved through seeking new clients or increasing sales.
Cons:
- Difficulty in budgeting: As mentioned earlier, budgeting can be challenging with variable incomes due to the lack of consistency.
- Financial stress: The uncertainty of variable incomes can lead to financial stress and difficulty managing expenses.
- Lack of benefits: Unlike traditional jobs with a fixed salary, variable income jobs may not offer benefits such as health insurance or a retirement plan.
Importance of Budgeting for Variable Incomes
Budgeting is essential for everyone, but it becomes even more crucial when dealing with variable incomes. Without a budget, it can be challenging to manage expenses and plan for the future. Here are some reasons why budgeting is important for those with variable incomes:
Staying in Control of Your Finances
By creating a budget, you can track your income and expenses and have a clear understanding of where your money is going. This gives you more control over your finances and allows you to make informed decisions about spending and saving.
Preparing for Slow Months
For those with seasonal employment or freelance work, there may be months where little to no income is earned. By budgeting, you can save money during busy periods to help cover expenses during slower months.
Achieving Financial Goals
Budgeting is an essential tool for achieving financial goals such as saving for retirement, buying a home, or paying off debt. With a budget, you can allocate a portion of your variable income towards these goals and track your progress.
Reducing Financial Stress
As mentioned earlier, variable incomes can often lead to financial stress due to their unpredictable nature. By having a budget in place, you can have a clearer picture of your finances and feel more in control, reducing stress and anxiety.
Tips for Budgeting with Variable Incomes
Now that we understand the importance of budgeting for variable incomes let’s explore some tips and strategies for creating a budget that works for these types of incomes.
Track Your Income and Expenses
The first step in creating a budget for a variable income is to track your income and expenses. This will give you an idea of how much money you are bringing in each month and where your money is going. You can use tools such as spreadsheets or budgeting apps to help you keep track.
Determine Your Essential Expenses
Next, determine your essential expenses, such as rent or mortgage payments, utilities, groceries, and transportation costs. These are expenses that you cannot do without and must be budgeted for each month.
Create a Variable Income Fund
To prepare for slower months, consider creating a variable income fund. This is a savings account where you can deposit money during busy periods to help cover expenses during slow periods. Aim to save enough to cover at least three months of essential expenses.
Use the 50/30/20 Rule
The 50/30/20 rule is a popular budgeting method that can work well for variable incomes. It suggests dividing your after-tax income into three categories:
- 50% for needs: This includes essential expenses such as housing, utilities, food, and transportation.
- 30% for wants: This category covers non-essential expenses such as dining out, entertainment, and shopping.
- 20% for savings: The remaining 20% should go towards savings, including retirement, emergency funds, and debt repayment.
This method allows for flexibility in spending while still prioritizing saving and essential expenses.
Be Conservative with Your Budget
When budgeting for a variable income, it’s best to err on the side of caution. In other words, be conservative with your budget estimates. This means underestimating your income and overestimating your expenses. By doing so, you can ensure that you have enough money to cover all your expenses even during low-income months.
Creating a Flexible Budget
The key to budgeting with a variable income is to create a flexible budget that can accommodate fluctuations. Let’s take a look at some strategies for creating a flexible budget:
Prioritize Your Expenses
As mentioned earlier, it’s important to determine your essential expenses and prioritize them. These should be budgeted for first, followed by non-essential expenses. This way, if there is a decrease in income, you can cut back on non-essential expenses without impacting your ability to cover essential expenses.
Use a Rolling Budget
A rolling budget is one that adjusts month to month based on your income and expenses. This type of budget allows for flexibility in spending and can accommodate variable incomes. At the beginning of each month, adjust your budget based on your expected income for the month and upcoming expenses.
Have Multiple Income Streams
Having multiple sources of income can help mitigate the effects of a fluctuating income. If one source of income decreases, you can rely on others to make up for it. This can also provide stability during slow months.
Plan for Unexpected Expenses
It’s essential to plan for unexpected expenses when creating a budget for a variable income. Set aside a portion of your income each month for emergencies or unexpected costs. This way, you won’t be caught off guard and can still stick to your budget even if an unexpected expense arises.
Saving Strategies
Budgeting for variable incomes doesn’t just involve managing day-to-day expenses; it’s also crucial to save money for future goals and unexpected expenses. Here are some saving strategies to consider:
Pay Yourself First
The concept of paying yourself first means setting aside a portion of your income for savings before paying any bills or expenses. This ensures that saving becomes a priority rather than an afterthought.
Automate Your Savings
Many banks offer the option to set up automatic transfers from your checking account to your savings account. By automating your savings, you can ensure that a portion of your income goes towards savings each month without having to remember to transfer it manually.
Cut Back on Non-Essential Expenses
If you have a slow income month, look for ways to cut back on non-essential expenses to free up more money for savings. This could mean cooking at home instead of eating out, canceling unnecessary subscriptions, or finding cheaper alternatives for everyday expenses.
Take Advantage of Windfalls
Windfalls, such as tax refunds or bonuses, can provide an excellent opportunity to boost your savings. Rather than splurging on these unexpected sums of money, consider putting them towards your savings goals.
Case Studies/Examples
Let’s take a look at a few examples of how individuals with variable incomes have successfully budgeted and managed their finances:
The Freelancer
Sarah is a freelance graphic designer who earns a variable income each month. To budget effectively, she tracks her income and expenses using a budgeting app. She also uses the 50/30/20 rule to allocate her income each month and prioritizes essential expenses. To prepare for slow months, Sarah has a variable income fund where she saves a portion of her income each month. This strategy has allowed her to save for retirement and pay off her student loans while still enjoying a flexible work schedule.
The Real Estate Agent
John is a real estate agent whose income fluctuates depending on the market and the number of sales he makes. John uses a rolling budget to adjust his spending each month based on his expected income. He also has multiple sources of income, including rental properties and investments, which provide stability during slower months. By being conservative with his budget estimates, John has been able to save for a down payment on a home and plan for his children’s college education.
The Seasonal Worker
Anna works at a beach resort during the summer months, but her job is only available from May to September. To budget for the rest of the year, Anna saves a portion of her income each month during her busy season. She also takes on freelance work during the winter months to supplement her income. By prioritizing her expenses and being conservative with her budget, Anna has been able to save for a down payment on a home and travel during her time off.
Conclusion
Budgeting for variable incomes may require extra effort and flexibility, but it is crucial for managing finances and achieving financial goals. By understanding the nature of variable incomes and using the strategies outlined in this blog post, individuals can effectively budget and save for the future, even with fluctuating incomes. Remember to track your income and expenses, prioritize essential expenses, create a flexible budget, and save for unexpected expenses and long-term goals. With these tips and strategies in mind, you can take control of your finances and achieve financial stability, regardless of the variability of your income.