Budgeting and Variable Incomes

Picture by Jeff Keen

I’ve wrestled with budgeting since becoming self-employed. How could we possibly budget when we don’t know from month to month how much income I’ll make?

Due to overtime, my husband’s income also varies pretty wildly, but we know the minimum and plan based on that.

I’ve finally reached a point where I think I’ve figured out a plan that works. I’m a slow learner. Don’t laugh. Starting two businesses in one year and managing the household finances is a big project for any gal! For those of you wandering around in the dark trying to figure this out like I was; here’s what I’m doing.

List your fixed expenses in order of priority—top to bottom

If you don’t have a budget, don not proceed. Do not pass go, go back a few steps and figure out your fixed and variable expenses for the month. This list should be the minimum you need to survive normally and keep the lights on and keep your credit intact. The minimum. I mean it!

Make a second list, in order of priority of items that you want/need.

This should be the list of all the “stuff” you want or need. Your emergency fund, paying off debts, savings for furniture, Christmas gifts, etc. The order of priority may change from month to month, so be prepared to change this list frequently.

Now what?

Now, with your monthly income, you pay the items from your fixed expenses, in order of priority. You make minimum payments on any debts. With any “variance” above that amount you apply it to the next item on your “wish list” (our first item is emergency fund, and second is an itemized list of each of our debts and after that we get into “stuff”).

If your minimum monthly income is not enough to meet your monthly fixed expenses plus minimums on debt payments, you need to slash your fixed expenses, and divert part of your income from a high month into a rollover fund—that can be spread in to fill the gaps in super-low months. You also might need a second job.

Being self-employed for nearly a year now, I’ve got a good idea of my average income per month and have a few “side hustle” tricks for picking up the income if it’s looking too low late in the month. I keep a running “work in progress” spreadsheet that shows all of my lines of business with rows for the projects that I’m billing and then a column for each month. I put the income amount in the month that I expect to receive the payments so that I can see my anticipated income each month. Each time an invoice is paid, I just hide that row. If I know a customer is going to slow-pay me, I just move it out a month, removing the “income” from this month’s projections and into next months.

By applying any income beyond your essential items in order of priority, you give yourself permission to stop spending when you run out of income for the month. You simply pick back up in the same place when your next check comes in—with the next paycheck, or invoice payment. If crisis hits and you can’t pay everything on your fixed list—you’ll be skipping purchases or payments on the least critical items (you sorted them by priority, remember?). You won’t find yourself foreclosed on or without food for the sake of paying or buying whatever was on your mind. Hopefully, this strategy will give you a plan, and with a plan will come peace of mind.
Good luck!