Consultations available by video and phone with electronic signatures.

Affording your expenses

Budgeting on a Variable Income

If you earn a variable income (you don’t earn the same amount each week/month), then it can often seem difficult to budget and afford all your financial commitments. The reality is that more and more people are moving away from the “typical 9-to-5” and working various jobs, taking on contract work, working on commission, or earning freelance income.

Fluctuating income or irregular income can make setting a budget difficult. If you earn the same every pay period, and you know exactly how much money you have coming in, you can then budget to spend less than you earn. However, if you earn a different amount each month or if you don’t know how much you’re going to make at any given time, planning becomes more complicated. That doesn’t mean it’s impossible. In fact, if you’re on a variable income, budgeting becomes even more important since you need to afford the same monthly expenses despite not earning the same money.

Here are some tips for budgeting and affording your expenses on a variable income.

Find Out Your Base Income

Take a look at what you’ve earned over the last few months and see if there is any consistency. Is there a certain amount that you always manage to earn, no matter what? If there is, then consider this your “base income.” This is the amount that you could reasonably expect to earn in most months. If this isn’t enough to afford your expenses, then you will need to come up with a way to cut some expenses, increase how much you earn, or both. You can also implement a plan where you put money aside in months where you earn more than your base, so that you can use this money later one when you haven’t earned as much.

You can also create your budget based on your average income. Look at how much you’ve earned over the last three years (or as far back as makes sense for you) and then divide this amount by the number of months you earned it in. This will give you an average. However, note that one or two months of very high earnings or very low earnings can distort the average. Plus, there will be some months where you earn less than average, so you’ll need to prepare for these.

Use Last Month’s Income This Month

This takes some planning and discipline, but it could be helpful to try to live off last month’s income this month. You’ll need to save for a while so that you always have about one-month of earnings in your account, and then create a new budget each month based on how much you earned the month before. You’ll need to have at least a month of savings for this to work, however.

Track Everything

When you’re budgeting, it’s always critical that you track your spending. This becomes even more important when you’re earning an irregular income. Throughout the month, track every purchase that you make. You’ll also need to track how much you earn. If you find that you’re spending more than you expected, or earning less than you predicted, then you’ll need to make immediate adjustments to your budget so you don’t overspend.

It sounds complicated and stressful, but if you create a plan for how you will do the tracking, you’ll get used to it and find that it’s very helpful.

Save for Known Expenses

If you know that a big expense is coming up in a few months (a wedding, a big anniversary, a holiday, etc.) then you’ll want to start saving for it as soon as possible. Since you can’t count on consistent earnings, planning for big expenses becomes critical. Add a category to your budget for these savings and make sure you stick to this plan.

Save for Emergencies

Unexpected expenses or a sudden loss of income can happen to anyone. That’s why it’s critical that everyone has an emergency fund. However, if you’re earning a variable income, it’s even more crucial. A slow month of earnings or the loss of a big client can hurt you financially and leave you struggling to make ends meet, unless you have enough emergency savings to deal with it.

Put aside a portion of your income each month for emergencies and save this money in a separate bank account from your regular spending money. Most experts recommend people on variable incomes save at least six months of expenses in their emergency fund. Start slow and build up over time until you have a comfortable fund.

Remember Taxes

If you don’t earn a regular paycheque, you probably don’t have income taxes coming out of your pay. For instance, if you earn freelance income, you’ll be expected to pay taxes later on, and you this means you’ll need to hold some money back. Estimate how much you will owe and make sure you have this money when you need it.