How to Budget on a Variable Income
As a freelancer or small business owner, your income won’t always be the same. Some months, you’ll be making way more than you planned. However, some other months, you might make the bare minimum. We’ll walk you through how to set up a budget to take into account your variable income.
Step 1: Plan for the Worst Case Scenario
When you plan your budget as a freelancer, you need to plan for those lower income months. In order to do this, we’ll base our budget around the worst case scenario. Go through your past 12 months of income and find what the lowest amount was. This is the income we’ll use as our base.
Step 2: Your basic living expenses
We all have certain expenses that are absolutely necessary. These are the ones that you need to take into account first. Make a list of how much each category will be in a typical month. Items to list include:
- Rent/Mortgage
- Utilities (Electric, Gas, Water, Internet)
- Food
- Healthcare
- Insurance
- Minimum debt payments
Step 3: Figure out what you have left
Subtract your basic living expenses out of your base income. This is what you have left for everything else. Split up what’s left between all of your other expenses. Keep adding anything left to these categories until you don’t have any money left. This section will include:
- Eating out
- Shopping
- Entertainment
- Savings
- Extra debt payments
Step 4: Split up extra income
Hopefully most months you’ll actually bring in more money than your budget says. When this happens, allocate this extra money towards some of your categories. You could save a little more, pay down some debt, or treat yourself to a meal out.
Pro-Tips:
Some of your expenses may only come due once a year or every few months, for example, maybe car insurance. To prevent having to come up with a large lump sum at once, divide the payment by twelve (or however many months go by between payments. Set this much money aside in your budget under your living expenses.
Allocate as much money to savings and debt pay down as possible. Being a freelancer or small business owner can have some rough patches. Having a little extra to fall back on is always helpful.
What are some ways you deal with budgeting on a variable income?
