Budgeting a variable income
My husband and I are both entrepreneurs. He does groundskeeping/lawn care/odd jobs and I’m a content creator, with the majority of my income coming from links I post on Instagram.
Neither of us make a set amount of income from month to month, and we can have big months or little months. I’ve been an entrepreneur since I started my photography business in 2016, so I’m used to variable income, but before my husband set out to work for himself 2 years ago, his income was very steady and predictable.
Someone recently asked me how we budget a variable income and what we do if we have a surplus one month.
Andrew and I have estimated a monthly total budget that fits within the bounds of normal income. Our income only varies within $1k-$2k per month so we have a rough idea of how much we make together. So, if we know we make between $4k-$6k per month, we try to keep things on the lower end, and might settle at a budget of $4500. (These numbers are purely for illustration purposes.)
So in our budget, we take total income and then we calculate percentages for the varying categories from that.
Our categories are:
tithe/charitable giving
saving (for taxes, since we are self-employed, and vacation are our saving categories)
bills (insurances, mortgage, electric, etc)
auto expenses (estimated gas and a sinking fund for auto repairs)
household (groceries, consumables, animal feed, housekeeping, babysitting)
fun money (our allowances and date night)
gifts
subscriptions
clothing (for us and Jane, and her clothing account is also her allowance)
We have accounts in our banks for each of the categories, and in one of our banks it allows you to have buckets to distribute the money in the subcategories. Every month, we transfer the lump gross sum (which would be $4500) and then the percentages of the categories into each bank account. Then the next month when we go to pay off our credit cards, we pay from those accounts. This is really complicated but it’s worked very well for us and is a lot less confusing than having one account with a big lump sum.
What happens to the leftover money?
Okay, so say our budget is $4500 but this month together we made $6000. What do we do with that “extra” $1500?
The one thing that will keep you spending more money than you have is thinking you have “extra” money. Note: there is no such thing as extra money. We put that money straight into our slush fund.
The slush fund is where we pull from if we unexpectedly go over budget (it happens) and it’s also where we pull from if we have a leaner month. This is SO important for us with variable income because one month we might make $3500 when our expenses are $4500! Having at least $2k in our slush is really helpful for us.
If we decide to go outside the budget for a purchase, such as food we haven’t budgeted for or car repairs that exceed the auto expenses account, we will also pull from slush.
The slush fund will save you from dipping into your emergency fund anytime there is a slightly unexpected expense, instead of having a lot of little emergencies and having to refill the emergency fund.
A note on credit cards
I think one thing that can be common if you have a variable income is to put charges on credit cards in the leaner months and pay them off during the fatter months.
I highly recommend NOT doing this. Why? Because it’s soooo easy to get into debt this way and spend more than you think. Your fatter months might be leaner for a while and you may not be able to pay them completely off.
We love having credit cards because of rewards and because they can be stolen and no one has direct access to your bank account. But we have always treated them just like debit cards. If we don’t have the money this month, we try extremely hard not to spend it. And I get it, that can be hard! That’s why we have a slush fund.
I also 100% understand living paycheck to paycheck. We’ve been there multiple times over the five years we’ve been married. But I still urge you to stay within your budget categories and not fall to the temptation of credit - and to do whatever you can to pad your budget with a slush fund.
Looking for more financial advice? Struggling to live on one income (or two, because let’s face it, times are hard right now)?
We’ve been there too. Andrew and I have lived on as little as $30,000 twice during our marriage and we’ve learned some tips and tricks to getting the most out of our money. I actually wrote a guide on living on one income from the experience we had, and it’s available with the template we use for our zero-based budgeting system. You can find it in my shop here.