Budgeting for Variable Income

If you are just starting out in the workforce, working part-time or as a freelancer, your income can vary quite a bit, both in terms of the timing and amount. The variability poses unique challenges to managing your finances.

The following guidelines can help bring stability to your financial life.

STEP 1: Project Your Minimum Income. Plot out the income you have earned recently and identify your minimum income level as a baseline for planning purposes. While discretion is needed to decide on the minimum income, think twice before you estimate. Don’t think low income figures are the exception. If it happened before, it can happen again. Being conservative is the smartest way to budget.

STEP 2: Identify Essential Expenses — One of the biggest pitfalls is to splurge and spend all your money the moment it hits your bank account. Needless to say, it ought to be avoided at all costs. Make a list of your essential expenses: rent, grocery bills, transportation, health care and other integral financial obligations. Jog your mind by looking at your check register and recent bank and credit card statements.

STEP 3: Plan Your Minimum Income against Essential Expenses — Do a simple math exercise: make sure your minimum income covers your essential expenses. If there is a shortfall, consider cutting down the expenses — cancel the non-essential subscriptions, share more and use alternatives. Don’t hesitate to be ruthless — to have financial security and sleep well at night is priceless.

STEP 4: Borrow from Credit Cards with Great Care — While borrowing from a credit card is sometimes necessary, always make a dedicated plan to pay the balance off. Treat it as an essential expense. The variability of future income increases the chance of prolonging the time to pay off. So always make it a top priority, as the rates associated with this type of borrowing can be exorbitant. Don’t equate minimum payment as real cost — minimum payments take very little off the principal amount borrowed and paying minimum can incur a total interest charge twice the amount originally borrowed.

STEP 5: Build up Savings — Sporadic income might sound like a great excuse not to save. However, having some savings is especially valuable to cover expenses with an up and down income picture and will greatly reduces the need to borrow. Several techniques can help you kick start the savings:

  1. Spend less than you earn. Make the cut or sacrifice, whatever it takes, to get things started.
  2. Always put additional income into savings. Do not splurge.
  3. Set goals/milestones. For example, milestone #1 is to set aside one month’s essential expenses. Reward yourself for the achievement.
  4. Set a savings goal based on the variability of income. While 3–6 months of living expenses is a great target, the more unpredictable your income is, the more savings would be required.

STEP 6: Take the Planning Process to Heart — A mistake many people make is to follow through the process once, and then stop. It’s critical to develop good habits with your money. First, because you will never have to worry where you’re going to get the money to pay a bill. And second, because you will have peace of mind like you’ve never had before.