When Your Income Fluctuates

People seem to think that the process of making a budget differs depending on who you are: self-employed, contract worker, part-time worker, salary grunt, small business owner. Hey, the point of a budget to figure out how much money is coming in and how you’re going to send it out again so you don’t end up in the red. How much you make is irrelevant to the budgeting process itself. Sure, how much you make dictates how much of a great life you can have, but it has very little to do with the budget, which is just a plan for how you’ll spend what you do make.

The biggest confusion seems to be around what to do if you don’t have the same amount coming in month after month or week after week. I’ve talked about this before, but let’s give it another go:

In order for a budget to work, you need to follow some basic rules. Here are The Gail Rules:

  1. The budget must balance. Since you can’t spend more money than you make without creating huge problems for yourself, this first rule is the foundation of money management.
  2. You must save something. Saving isn’t a nice-to-do that you accomplishing with what’s left over every month. Saving is a Must Do, which is why you must allocate some money to savings each month. Make the savings automatic by setting up a monthly transfer to a high interest savings account and you’re locked and loaded.
  3. You must pay off your debt. All that money you spent that you haven’t yet earned has now come Due & Payable. Yup, your shopping has come home to roost. Each dollar that you spend in interest is money down the drain. And each month that you make only your minimum payment takes you a step closer to Debt Hell.
  4. You must make provision for the “risk” in your life. Emergency funds and insurance are the tools that you use to reduce your exposure to risk and financial ruin.

Time to make your budget. Your budget is broken down into two parts: Fixed expenses and Variable expenses.

Fixed expenses are the things you pay regularly for which you must cough up a specific amount of money. For example, rent is a fixed expense. So is your car payment.

Variable expenses are the things that change somewhat each month. For example, while you may budget $600 a month for food for your family, that amount isn’t fixed since it may fluctuate depending, for example, on the season or what you must buy this month. (Gee, why does all the laundry stuff run out at the same time?)

But budgets can also be broken down along the lines of Needs and Wants or Must-Haves and Nice-to-Haves. Within your Fixed expenses, for example, you may be living in a place that costs you a bundle every month. That’s not a need. You need to keep a roof over your head, but you don’t need to live in a McMansion. If you can’t afford it – if your cost of accommodation is pushing your budget out of whack and there’s no where else to cut back – it may be time to call the movers!

Take these steps to make a budget

1. Take your budget worksheet and enter in your net income… all of it.

2. Now enter in your Fixed expenses, starting with the Must Haves: (Use black ink to enter these numbers so they are easily identifiable as Fixed Must Haves.)

  • Rent or mortgage payment/property taxes
  • Car payment
  • Insurance
  • Saving
  • Debt repayment
  • Emergency saving

Saving, debt repayment and emergency savings are MUST HAVES. Remember Rules #2, 3, and 4! The must-haves are the things that won’t go away, so you must plan to have them covered every month. While you may be tempted to ignore savings if your budget is tight, don’t. Even a small amount like $25 a month gets you on the right path. Totally ignoring savings until “things get better” means you’re stuck in Not Saving Land. Just a little is all it takes to cross the border.

3.   Now enter in your Variable expenses, starting with the Must Haves: (Again, use black ink to enter these numbers so they are easily identifiable as Variable Must Haves.)

  • Groceries
  • Transportation
  • Medical

4.   Go back to your Fixed expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Fixed Nice-to-Haves.)

  • Telephone
  • Cable

The nice-to-haves are the expenses that you can make go away, although variable nice-to-haves are easier to cut back on in the low-income months. But even fixed nice-to-haves can be moderated (use your cell phone less, cut down on your cable package for a couple of months) if need be.

5.   Go back to your Variable expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Variable Nice-to-Haves.)

  • Clothes
  • Gym membership
  • Travel

Sometimes there’s a cross-over between must-haves and nice-to-haves, like when your only pair of winter boots are no longer servicable: then that “clothing” item becomes a must have. This is particularly true if you have kids who will insist on growing. In this case, you put in a must-have number to cover the basic needs, and then upgrade it to a nice-to-have number for all the extra things you will want. If you have to cut back later on, the nice-to-have have got-to-go!

6.   Add up all your expenses.

7.   Subtract your total expenses from your total income.

8.   Do you balance? If you’re over, you’re going to have to either cut back on your expenses or find a way to make more money.

When you’re working with a variable income, it is at this point that you need to make some big decisions. In your dry months – lowest income months – you may only be able to afford the basics. In your flush months – highest income months – you need to:

  • catch up in some categories of your budget you may have been squeezing, like home maintenance, vacation, clothes, gifts, etc.,
  • set aside some money to make sure you have an extra pool of cash available for the dry months so you can meet your most basic needs.

9.   To cut back on expenses, start with your Nice-to-Have Variable expenses. Trim back. Then move to your Nice-to-Have Fixed expenses. Are there ways to cut those costs. Next, look at your Must Have Variable expenses: where can you trim there? And finally, are there ways to trim your Must Have Fixed expenses? For example, if your housing costs are high but you really love where you live, could you take in a roomie to help with the costs?

10.   If you can’t make ends meet no matter how far back you cut then you simply do not make enough money. Time to get a second job, a third job or a better job. You have to do WHATEVER IT TAKES. Not making enough and using credit to fill the gap is financial suicide.

The mistake most people make with a variable income make is spending every penny when they have a flush month or three. Having been living on less during dry months, they see the flush months as the opportunity to spend, spend, spend. Big mistake. You must first ensure you have the money to see you through the next dry spell. Then you can go shopping!


Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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17 Responses to “When Your Income Fluctuates”

  1. avatar colleen Says:
    May 3, 2010 at 7:25 am

    Budgeting on a variable income isn’t easy, but it can be done.

    One thing that helps us, is that i plot out which bills are due for each pay. I do this for a few months at a time. Then, when we have a ‘good pay week’, i can set aside monies to cover future bills. Works for us.

  2. My Wife and I have been budgeting for over two years. every single month. It works great. We have paid off all of our debt and are now ont he road to a very prosperous future. We are proof that building a budget works miracles.



  3. It’s nice to see that other people don’t think it’s impossible to budget on a variable income! It’s only through careful budgeting that my guy and I (both students) will be able to live on a total income of only $8000 for 8 months including 3 tuition payments and mortgage payments!

    I think the important thing to remember when budgeting for a variable income is to look to the future. We would be seriously in the hole if we hadn’t looked ahead last year (when the total income was about $45000) and realized that we would have to balance out for a year when I’m in full time classes for 12 months. Even while we were earning well, we lived on almost nothing, saving against the future. Instead of the new floors that we wanted, our tax return has gone to paying off our credit card in its entirety so we don’t need to worry about it. No sense paying $300 a month in minimum payments when we can pay $3000 now and forget about it all!

  4. Great post! I live on a variable income (supply teaching) and have a new budget each month! I update that budget regularly (whenever I get a new teaching day). I really enjoy budgeting so it works out well.

    Last month I made over triple what I usually make and all the extra went to savings and debt. I gotta have those in check before spending on stuff I want. Hoping to be debt free in the next few months!!

  5. I have a quarterly rich month, so I tend to take all of that extra money and drop it on a bill. While I still make more than minimum payments on items, there is nothing more thrilling than seeing a debt drop in the thousands.

    @Manda That is amazing! Most people would not be able to have the foresight to manage that.

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  7. We also live on a variable monthly income. To that end, we have set our budget based on the lowest amount we’d likely make, which allows us to cover all our fixed and variable expenses AND save $500/month. If we make more money, it goes towards savings and planned spending. If we happen to have a particularly dry month, which happens occasionally, we have our planned spending (not our emergency fund, which we treat as sacred) to draw from to cover our essential expenses if necessary. It works!

  8. My boyfriend and I have lived on a variable income for almost two years. I’ve found that keeping a list of our bills helps. As we get income, an amount gets put aside, an amount is reserved for food, etc., and as many bills as possible are paid. Most often, we have all our list covered by the middle of the month, then we put most of the rest aside. Then when we have low months, like last month, we can pull money back into the budget. It doesn’t always work, like when our savings was blown on car repairs, but it’s better than nothing.

  9. avatar Amelia Says:
    May 3, 2010 at 1:31 pm

    I based our budget on the minimum amount we’d bring in in a month. That way we knew all the bills would be covered and the rest of the money went into savings.

    Manda, congratulations on making a student income work for you!

  10. I remember the days of the insecure/fluctuating income. I had a 3 year old and a newborn. I had no teaching job and was reliant on the calls for supply teaching. My husband worked shiftwork. It was a horrid catch 22. I couldn’t get a daytime job if I wanted to get my foot in the door via supply teaching. I couldn’t get an evening job with husband working those hours as it would mean getting a sitter (which would eat up any money the part time job would give me). Just to make things interesting, my husband’s work went on strike for 9 months shortly after that. It was an absolute nightmare for us and how we made it, I honestly don’t know. I’ve blocked out most of those memories.

    The most humbling moment was to have a knock at my door and find people there with a Christmas basket/hamper. We’d made it on ‘someone’s list (our church’s). I was heavily involved in the church then and to receive one of the hampers that I had helped pack up myself three days before made me bawl for hours.

    Puts things in a whole different perspective.

  11. Nicely done, Gail–I like how you have broken things up into the different categories. We live on a fluctuating income, and have put your advice into practice over the past year. Last month, we had a BIG car repair bill–$1700. And thanks to your systems and our hard work, we actually had the money to pay for it already sitting in an account! Whoo-hoo! That is the first time in my life I have not had to put it on credit (card and eventually LOC) and IT FELT GREAT!

  12. Can I just say to all the self-employed without a proper business account… get one!! My husband has been self-employed in construction for the past five years. In the beginning it was pretty straightforward, nothing really more difficult than a few cashed cheques here and there. Then things gained speed… almost overnight! Had he a proper business account at the time we could have taken advantage of the growing momentum, instead of it derailing my “numbers.”

    We were both pretty fastidious about balancing the books, it just became unmanageable. Do you and your business a favor and get your books in order yesterday!

  13. @jolie… I too received one of those baskets once many many years ago and words can never say how grateful I was for it. If you have small amounts of time or money, you can really make a big difference. These local basket charities and toys for kids are an excellent, positive, community minded choice.

    Off topic, sorry.

  14. Oh and my partner and I now have super-non-variable biweekly pay but this is a good reminder about budgeting regardless.

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