How to Create a Budget for Variable Income

With people increasingly using technology to make money from home, it is becoming more common for many of us to live on a variable income. The problem for many, though, is how to create a budget for variable income?  Whether you have a stable base of income, with some variable elements, or whether your entire income is variable, you need to have some sort of plan for your money.

Estimates: Break Down Your Monthly Income and Expenses

The first thing to do is get a general idea of what you make.  My income, as a freelance writer, varies by $200 to $600 month to month, depending on what projects I am working on, in addition to my regular client base.  However, last year I made six figures.  So I can start with my annual income, and divide the total by 12.  That will give me an average monthly income.

Next, take a look at your expenses.  An overview of major budget categories can quickly give me an idea of what I spend on a monthly basis, on average.  If you have some expenses that are billed every six months, you can divide that by six, to get an idea of what your monthly cost would be.  That way, each month you are “paying” your monthly auto insurance premium, keeping the money earmarked so that you aren’t scrambling to pay it all at once.  The same strategy should be applied to your quarterly taxes.  Figure out a monthly “payment”, and set the money aside, so that it is readily available when the due date arrives.

Covering Shortfalls

How to create a budget for variable income

How to create a budget for variable income.

Even though I have a monthly average, sometimes I make more or less.  If I get a client who wants some emergency editing of a big paper, I might make an extra $300 that month.  However, if a three-month project is coming to a close the next month, that might be a shortfall of $400.  Of course, the key is to plan your expenses so that they fall within your monthly average.  Then, when you have a month that nets you extra money, you set that aside into some sort of savings fund — unless you are disciplined enough to just let it sit in your checking account without spending it.  (But you might miss out on interest if you don’t have an interest checking account.)

In my example above, I had a temporary three-month project.  That $400 a month put me $250 over my average income.  So, for three months, I put aside that $250, for a total of $750.  Plus, I had an extra $300 on top of that, so my total is $1,050 extra.  Starting next month, with end of my temporary project, I will be $150 below my average — unless I can pick up another project.  However, if nothing changes, the money I set aside will last me seven months of covering that $150 shortfall.

Know What You Will Cut from Your Budget

Of course, one never knows what could happen next month; I might lose a major client and have to make up for $1,008 a month.  Suddenly, the money that I’ve saved up will barely cover the shortfall.  This is why it’s a good idea to prioritize your spending.  I know exactly which of my regular monthly expenses could be immediately cut in order to help cover a drop in variable income so large that it would alter my lifestyle.  Some of those items include the satellite TV subscription, how often we enjoy eating out, and some of the entertainment we engage in while hiring a babysitter.

Think about what immediate changes you could make to your expenses if a sudden income drop affected you, and be sure to consider your income diversity. Relying too much on one source of income might be a problem if that one source dries up.  With these tips, you should be able to create a budget for variable income.

What other ideas do you have about creating a budget for variable income?

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Published or updated August 15, 2014.


  1. One solution is to not count the variable income! My approach would be to smooth out the income. I would use the lowest month as a guide and bank the excess until I could reasonably predict my earnings. Use the banked dollars to adjust any shortfall.

  2. Variable income is tricky. Great post though in explaining how to manage and budget that kind of income. You definitely have to have self control and discipline to really manage that unpredictable cash flow.

  3. “I know exactly which of my regular monthly expenses could be immediately cut in order to help cover a drop in variable income so large that it would alter my lifestyle”

    Great point. You have to prioritize your expenses from most important to least important when you have a variable income. If you have a low month, the least important expenses will have to be cut or eliminated so you don’t end up spending more than you make by using credit cards and such.

    I recently wrote a post about budgeting on a variable income that may provide some additional insight on the subject.

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