If you are struggling to manage your money with a variable income, a flexible budget may be your secret weapon. Variable incomes are much more prevalent now than in the past. According to the Bureau of Labor Statistics, at least 21 million American workers do not earn regular and predictable income.
The most common employment for variable incomes include:
- Contingent/temporary job places – these workers are either employed directly or work through temporary agencies
- Independent contract work
- On-call work with no regular hours
- Work through contract firms
- Freelance work
All of the above and many more people do not have a fixed income every month. These and millions of other workers rely on a wage that fluctuates based on factors beyond their control. Budgeting shouldn’t be a complicated process, but when you do not know how much you need to budget for, the process becomes difficult.
If the income you get every month varies, there is still a way you can create a budget that meets your monthly needs and even allows you to save.
Understanding A Flexible Budget
You can look at a flexible budget in terms of corporate finance or personal finance. Corporations have complex formulas and software to streamline their accounting period budget report based on the earnings every month. However, a flexible budget requires cutting costs when the income is low and increases expenses and savings when the income is higher.
Corporations alter their budgets based on varying costs and revenue. The budget comes out at the beginning of a fiscal year based on the amount of money the business has, its needs, and the expected revenue.
Having a flexible budget allows a company to accommodate its needs and changing business infrastructure. For instance, a business might need to change its staff levels in a fiscal year based on business activities’ returns. Or, a company might invest more in product research if a business gets more returns in a given year.
Personal finance and personal flexible budgeting are essential to millions of people around the world. Unlike corporate finance, where a budget comes out at the start of a fiscal year, personal finance requires managing a budget every month, because this is how billing cycles work.
Your budget should account for your variable income and shifts in expenditures every month. This is where a flexible budget comes in handy. Unlike a fixed budget, a flexible budget adjusts and is more fluid.
A flexible budget can allow you to save more and meet your needs every month when it’s done right. Here, you can vary your spending to accommodate the challenges you face.
Your spending will vary from one month to the next. For instance, if you buy a phone in December, you will not need another one in January (unless you lose or damage your phone). This way, you will need to adjust your spending and savings based on how much you make every month.
Budgeting For Variable Income
As a non-salaried worker, such as a solopreneur, freelancer, seasonal businessperson, or contingent employee, you need to come up with a budget that accommodates your varying needs. You need to build a sustainable and realistic personal budget that fits your irregular income.
Because the non-salaried workforce is diverse, you do not have to stick to an A-to-Z guide – you can tweak the guide below to find what works for you and then stick to it.
Follow The Simple Steps Below To Create Your Flexible Budget:
Add Up Your Fixed Spending
Non-discretionary spending refers to non-negotiable and recurrent expenditures. These bills do not change, and they include:
- Housing – Housing expenses include rent and mortgage payments. You will need to account for principal and interest on a mortgage, homeowner’s insurance, property tax, and homeowners’ association costs for mortgage expenses. No matter how much your income varies, you must meet these budgeted costs.
- Utilities – Utility bills include water, electricity, phone, and heat.
- Groceries – Here, you need to account for the bare essentials you need every month, including onions, tomatoes, flour, and such other monthly items you need. This category does not include take-out and expensive meals bought in restaurants.
- Child Care – These are bills you have to meet to take care of your child. They may include daycare, baby sitter salary, tuition fees, etc.
- Transport – This category includes public transit fares, fuel, and automobile maintenance.
- Taxes – As a non-salaried worker, tax withholding is not automatic. You have to estimate and make tax payments to the state or federal revenue bodies. When creating a personal budget, divide your estimated quarterly tax payments to see how much you should pay every month. Because you do not pay the taxes every month, set the funds aside in a high-yielding savings account.
- Insurance – The amount you spend on insurance will depend on the premiums you are subscribed to. You may have to pay for auto insurance, health, life, renters, and disability insurance. If the budgeted expenses are not deducted from your account every month, you might have to contribute to tax-advantaged accounts such as flexible spending accounts for later use.
- Debt Service – Do you have any loans you pay in installments? The loans might include secure or unsecured personal loans or revolving debt, such as credit cards. Paying your debts on time ensures that interests and penalties do not affect your budget every month.
If your spouse or partner has an income, add their income and bills to the calculations. After meeting the non-discretionary costs above, you can now alter your spending based on how much you have left. Even if you had a static budget model, one where your income is predictable every month, you still have to account for the needs above.
Calculate The Average Variable Expenses Per Month
After meeting your non-discretionary costs, what’s next? To learn more about how much you spend on wants, look back at the last 6 months to get a good sample size. Your average will be more accurate if you have records of your daily spending for the previous month. These records include receipts and other accounts to estimate your discretionary expenses (wants) even better.
- Check the credit cards you use regularly
- Any accounts linked to your debit card
- Reloadable debit cards
If you only use cash for everyday expenses, add up your bank withdrawals and subtract how much cash you have left at the end of the month. You need to add your non-discretionary (fixed needs) spending with your discretionary (variable / wants) spending to find your discretionary income over the past six months.
If your discretionary income shows you spend too much every month, you might want to cut back on your variable expenses.
Calculating Your Average Monthly Income
Although your income might be irregular every month, you still need to estimate your average income every month to find how much you need to budget. To do that, you need to look back for six to twelve months.
Check your bank account statements and any amounts you received in cash. Divide your total income by either six or twelve months to give you the average amount you make each month. This number can be used to help you budget correctly.
Do not add any pending commissions or unpaid invoices to the total budgeted amount. If your partner has an income, regular or irregular, add it to the total income for every month, making up your monthly discretionary income.
Remember To Include Savings
Regardless of how much you make, you need to save every month. While you can set a non-discretionary amount to save every month, savings should be discretionary. In case of an emergency, you might have to stop goal-oriented savings accounts such as savings to buy a car.
As a non-salaried worker, saving should be a priority as you face more uncertainty than someone with a salary. Treat your savings as non-discretionary, meaning treat it like a bill you have to pay, and do it every month.
Depending on your average income, you can set aside a given amount to save every month. If you have money left over at the end of the month, save it for the months where you make less than you expected.
If you have multiple savings accounts, set priorities to each of these accounts, so you never miss important payments. If, for instance, you haven’t started saving for retirement, start today.
Depending on how much you earn and how much you spend, you can pay yourself a salary that meets your expenses (needs). You can deposit the salary in your checking account for use every day. Deposit the amount on the first day of every month.
The salary you deposit in your account should equal the total amount of expenses you expect to have each month. This includes both your needs and your wants. If you find you are spending less every month or earning more, you can change the amount of salary you pay yourself every month.
Although your salary account will have the bare minimum to take you through the month, it is always advisable to practice zero-sum budgeting. This is the practice of saving money from your budget so you end up with surplus (extra money) and not a deficit (negative balance) from your salary account.
Separate Your Fixed And Variable Expenses
Your variable expenses determine how you create your budget. The fixed expenses should rarely change, but your variable budget model can vary from month to month. You need to ensure a distinction between your variable and your fixed costs to avoid overspending on your discretionary expenses.
You can create two separate accounts for the two expenses. If you use the same account, create two columns on the budget ledger to ensure you spend the fixed costs for variable costs. However, the easiest way to segregate the two is setting a day every month to pay all your nondiscretionary expenses.
Advantages Of A Flexible Budget
A static budget model is dependent on your bills every month and factors such as the cost of products you use every month. A flexible budget, on the other hand, is more dependent on your income.
For instance, if your budget is $1,000 for entertainment every month and your average monthly income is $10,000 you need to be flexible to change your spending depending on your income. If your income falls to $7,000, you will need to reduce the amount spent on entertainment to $700 or more to meet your needs.
Without a predictable income, there are months you will earn more than your monthly expenses, and there are months you will make less. When you do not overspend on some months, by saving your money for low-income months, you will have enough to spend on months you do not have enough.
With a flexible budget strategy, you tie your expenses to your fluctuating income. Here, you can reduce your spending to take advantage of opportunities such as interest on savings. If your income increases dramatically in some months, you can save or make more investments to boost your future income.
Review Your Earnings
Because an ideal budget is one that meets your needs and falls within your income range, you should review your income every month until you see consistency. If you have multiple income sources, including a seasonal business, freelance work, and contracts, you need to pay attention to your income even more.
To increase your income, you can concentrate your efforts more on the revenue streams that bring in more money and possibly get rid of poor performing income streams.
To create a great budget from variable income, you need to collect data on your income and expenditures. This allows you to understand how different factors affect how much you earn every month. For instance, seasonal changes can affect how much you earn and how much you spend. If winter is a low season where income stalls, you can plan ahead to ensure you have enough money to get through it.
Disadvantages Of A Flexible Budget
The main disadvantage of a flexible budget is you may fall into unhealthy habits. For instance, if you create a static budget strategy (fixed and not flexible), you limit your spending to a given amount every month.
A fixed budget ignores flexible income and doesn’t always allow for contingencies. You might be lured to go out for a beer or two on happy hour forgetting the next month requires additional savings.
Companies find a flexible budget useless when they need to compare revenue and expenses for other months.
If most of the costs you incur every month are fixed, you will not benefit from a flexible budget, even with an irregular income. If your monthly costs include housing, transport, grocery, phone bills, debts, child care, and other fixed expenses, and only a few variable expenses, you may not need a variable budget.
If you use a flexible budget strategy to create good financial habits and not propagate your bad financial habits, a flexible budget might be the tool you need to keep your finances in check.
How Do You Stick To A Flexible Budget?
A flexible budget is not exact. You will have enough to meet your baseline expenses in some months and have more left for savings. In other months, you will have just enough for your baseline budget and nothing left to save. After a bad month, you will barely have enough to meet your baseline expending, and you will be forced to dip into your slush fund from your variable expenses.
To ensure you have enough every month, you need to create a lean budget strategy you can meet on bad, average, and good months. This helps you avoid the original budget cuts and the deferred spending that comes with irregular income.
Below are simple strategies to help you stick to your budget.
1. Save The Surplus (extra)
Instead of increasing the amount you spend on variable expenses every month, save the extra income for the bad months. On good months, the temptation to spend the surplus amount on luxuries and other wants is common. The more you save on your lucky months, the more you will have if the next month is bad.
2. Keep A Separate Account For Your Income And Spending
You need at least three liquid accounts to keep your money organized and stick to your budget. They include:
- A checking account to receive income throughout the month
- A checking account for your monthly spending — this is where you deposit your monthly salary
- A savings account to hold your interest-bearing money
Every non-salaried worker should have at least three accounts, but you can have more if you wish. For instance, you can have multiple goal-oriented savings accounts and separate the income from tax payments in a separate account. These types of accounts are called sinking funds.
If you do not have much left after meeting your necessary expenses, you can start with three accounts and build up later if your income increases.
3. Always Have An Emergency Fund
Everyone needs to have at least three types of savings – retirement savings, emergency funds savings, and goal-oriented savings. A primary emergency fund should support you for three months with no salary coming – in or minimal income.
An ideal emergency fund should sustain you for six to nine months with no compensation coming in. You should keep your emergency funds in a high yielding account where you enjoy extra interest payments every month or every year.
If your income is irregular, there is no telling the next time you will face a financial constraint. You still need to have a longterm savings account, but it is better to prioritize your emergency savings over retirement savings. If one of your primary revenue streams or all revenue streams fails, an emergency fund ensures you will have enough to pay your basic necessities for a few months.
4. Find More Revenue Streams
You need to have a lean original budget, but it doesn’t hurt to enjoy a few pleasures every month if your income allows. However, to do that, you need more income every month, which can come from finding new sources of revenue.
If you have the time, activity level, and talent, you can increase your monthly income and avoid having to slash your budget on wants. There are many ways to get extra income from doing simple tasks. You can:
- Do app-based tasks from your phone or computer such as surveys
- Sell stuff you no longer use
- Take a second or third job
- Freelance as an expert consultant
- Start a blog on a topic you are well-versed on
- Market digital products on your free time and get a commission from sales
Even a small income from the above or any other activity will help you stay afloat with a flexible budget.
5. Enroll In Autopay
Autopay is a useful tool when you are not disciplined enough to pay your non-discretionary expenses on time. Even if you are disciplined, an emergency might come and force you to rearrange your budget. Note that if you pay your debts late, you will incur a penalty, affecting your original budget the following month. Missing a payment will impact not only your budget but also credit score.
All business services, such as credit card issuers, mortgage servicers, and utility companies, should offer you an autopay option. Take the opportunity and link it to your salary checking account.
For non-corporate bills such as rent, you can set recurrent bill payments with your bank. This way, the only money left in your account will be what you need for discretionary or variable expenses.
6. Review Your Variable Expenses
Your variable expenses need to be flexible based on your varying income. You need to keep the variable expenses lean and manageable at all times. Review the costs every three or six months. While at it, trim any unnecessary costs, such as a gym membership you haven’t used, or a phone package you do not need.
Depending on your income, you can limit your expenditure on dining and outings and other expenses.
7. Avoid Impulse Buying
You need to avoid impulse buying. However, if you cannot control the urge to buy that new dress you don’t need, you can use envelope budgeting.
The process is simple – you need to create shopping categories and place cash for each category in an envelope. The money on the envelope should only be enough to cover the expenses for that category.
If you spend $450 on groceries each month, your envelope should only have $450 in it. Do this for all the other monthly expenses, and you will be good to go. Once the money in every envelope runs out, you are done shopping.
You might also want to avoid paying for goods with your credit card, as you will always have more money to buy items you do not need.
Example Of A Flexible Budget
How do you create a flexible budget? Start by creating two columns for your fixed and variable expenses based on past income and past expenses. You need to list your average monthly income and account for changing the costs of products and expenditure.
- Estimated annual income – $60,000
- Estimated Monthly income – $5,000
- Estimated monthly expenses – $3,700
- Rent – $1,500
- Groceries – $300
- Bills and Recurring costs – $1000
- Phone bill – $60
- Electric bill – $50
- Cable and Internet – $50
- Transport – $150
- Heat – $50
- Student loan – $650
- Daily expenses – $700
- Entertainment – $250
- Vacation Fund – $450
- Savings – What remains from the budget
From the above budget (yours can be different and include other categories such as childcare), you can alter vacation funds, savings, daily expenditure, and entertainment expenditure. Although the amount you save will change every month, you need to have a savings target.
The following month, you might have other costs such as car maintenance, replacing the phone, or any other that was not there the previous month. The changing costs of goods and services will also affect how much you spend every month as inflation might drive up groceries.
The bottom line is, your budget will change every month based on your income and expenditure. When that happens, you need to be ready to meet the costs without affecting your emergency fund.
If you do not get a steady paycheck every two weeks, you will need to modify your budget every month. Your expenses, just like your income, will not be the same every month. Since life is always unpredictable, there will be a month you will take your car for service, and a month you may have to pay unexpected medical bills. That’s how life goes.
Because your salary is not regular, you need to create a system that ensures you have money to meet your monthly budget at all times. Prioritize saving for the bad months and keep your budget lean. You also need to teach yourself discipline when it comes to personal finance and tweak your budget as necessary to meet your needs.
Income and expenditure vary from one person to the next, and you do not have to stick to one budgeting system – you can tweak the system above to meet your needs.