Personal Finance

How to Budget on a Roller Coaster Income

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Are you a freelancer or a commission-based worker? Maybe you have a second job with variable hours? Or perhaps some months you get a ton of overtime, while other months you get none?

In any of these situations, creating a budget can seem impossible.

Most zero-based budgeting tutorials have you start out with your income at the top of the page. Then, you add up your expenses until income minus expenses equals zero.

If you don’t know your income before the month starts, though, how are you supposed to create that zero-based budget that will help you control your spending and save more money? (Because a good budget can definitely do those things!)

All is not lost. You can effectively budget for your roller-coaster income. Here’s how:

Method One: Prioritized Spending

One option is simply to prioritize your spending. Make a list each month of where you need to spend money and where you’d like to spend money.

Start with the essentials – food, utilities, housing and gas/Internet (depending on whether you work on site or telecommute). Then, list other needs – your minimum student loan and credit card payments, necessary clothing, your cellphone bill, annual essential expenses, etc. Finally, list wants in their order of importance. Things like date night, video game money and even cable go near the bottom of the list.

Each month, as you get paid, spend money on your expenses in this order. It’s very important that you don’t go out of order. Otherwise, you might wind up being unable to put gas in the car to get to work because you already paid your cable bill.

If at the end of the month you don’t get through the whole list, at least you’ve covered your essentials. If you get through the list with money to spare, you can save the extra for a rainy day, pay off debt or whatever.

This is a simple way to create a pared-down budget for your variable income. It works, but it does require discipline and can get tricky when, for instance, your cellphone bill is due early in the month.

Method Two: Get a Month Ahead

If you have any leeway in your budget, this is a good option to work toward. Basically, you’ll spend money the month after you make it.

So if you make $3,000 in January, you’ll create your February budget based on spending $3,000. Then if you make $5,000 in February, you’ll be able to spend $5,000 in March.

Of course, to do this, you basically need to bank a month’s worth of expenses to start saving each month’s income for the next month. This takes time and discipline, but it can be totally worth it.

This method’s main benefit for variable income earners is that it takes away the roller-coaster feeling. You know each month what you have available to spend. Instead of getting toward the end of the month and thinking, Hmm, I don’t have enough to pay the cable bill, you’ll know at the beginning of the month that you need to make cuts in other areas so you can pay that cable bill!

Getting a month ahead may take a few months. In the meantime, use the prioritized-spending budget, and sock away any extra cash for your “month ahead” fund. Once you have enough in savings to cover a month’s worth of expenses, you can start living on last month’s income.

Method Three: Pay Yourself a Salary

If you tend to earn a lot of money during certain periods of the year and not much at all during others, this is a good option.

Basically, you set up a business checking account where you deposit all your income. (Or, if you have a regular job that happens to pay overtime or commission, a separate personal checking account.) Put your income into the separate, not-for-spending account first. Then, set up automatic transfers for a set amount once or twice a month to your personal checking account.

Figure out how much to transfer by averaging how much you made in the past 12 months, and transferring your average monthly income into your personal checking account each month.

(Note: It’s easiest to start this method during bumper months, when you’re earning more than you would on average; otherwise, you may not have enough money to transfer over.)

In some months, you’ll make more than your “salary,” but leave it alone – you’ll appreciate that extra padding during leaner months. And paying yourself this way will even out your budget, so it won’t feel quite so up and down.

These are just three of the main options for budgeting on a variable income, and any of them could help you get your money under control when you don’t know what you’ll make each month.

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