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After working a 9-5 job or relying on consistent payroll, moving to variable income can be a huge adjustment. You may find yourself suddenly overspending or that the numbers in your bank are all over the place. Not ideal!

When you have a fixed income, you always know what to expect in terms of income. You always know your expenses are covered and that anything extra you make can immediately go towards savings or financial goals.

But when you’re self-employed or working with inconsistent income, it’s a completely different story. You don’t know what to expect every month and find your finances utterly unpredictable.

Don’t worry, I’ve been there myself and know how scary things can be! But, by now, I know how to manage variable income and have found the joys in making my own money.

Here’s everything you need to know if you’ve just made the switch to variable income.

Variable Income vs. Fixed Income

To some, you always know how much you will earn every month. This is considered fixed income. Most often associated with salaries, you have a pretty solid idea of what type of income you’ll get each month, bi-weekly, etc.

Variable income is when the amount fluctuates every week. You could have an extremely high earning month and then a low income the following month. This is most often associated with self-employed individuals, those working in sales and off commission, or hourly wages where hours fluctuate every week. It can also include tips and investments.

Irregular income and variable income are often used interchangeably when there really is a noticeable difference. Anything that you receive only occasionally or unexpectedly would be considered irregular. Think of things such as birthday gifts, inheritance, tax refunds, etc.

Practical Tips for Managing a Variable Income

Not knowing how much money you’re going to have can really make you feel anxious. But with the right systems in place, you’ll come to know exactly where your money should go and how to plan for the future even when you don’t have an exact dollar amount coming your way.

1. Find your average income.

When earning variable income, one month will look very different than another. December may earn you plenty of sales due to the holiday season, and in January, you may see those numbers plummet.

Most people on a variable income have very different months in terms of income, so don’t worry if you see your numbers fluctuate. Higher months of income will always come back!

Since you may see so much irregularity, you have to look at the past quarter rather than just the previous month to get an idea of your average income. Look at the past three months to get a snapshot of what your money has been doing. Add up your total income, then divide the number by three to figure out your average monthly income. This will help you budget and plan accordingly for your expenses.

You also want to consider your average take-home pay. Just because you earned a certain amount of money, not all of it goes to your wallet. For instance, you may have to set aside money for taxes or business expenses. Make sure that you determine the amount of money you have to spend rather than set aside.

2. Find your average expenses.

Likewise to above, you need to calculate your average expenses. Ideally, as income goes down, so should your expenses. However, some months are more expensive than others. For example, you may have to purchase a birthday gift or decide to go on a vacation which will increase your average.

Figuring out average expenses over the course of three months gives you a better sense of all kinds of expenses, so you never spend more than you earn. If you do this every quarter, you can see how things change and notice any patterns.

3. Budgeting with a variable income.

Once you have your average income and expenses, you can begin to create a budget for the upcoming month. Before the next month begins, estimate what you think your income will be. Determine this by looking at your average income, patterns (if you notice consistent ebbs and flows), and any income you know is coming your way.

Next, assign every dollar of that income. Start off with the expenses you know you have, such as bills and mortgage payments, and then budget for more based on your average expenses.

You also want to include your financial goals as part of your expenses. Determine ahead of time how much you want to put aside for your car payment, travel fund, college loan, etc.

As a rule of thumb, budget on the lower estimate of what you think your income will be. By underestimating your income and overestimating your expenses, you ensure that you’re always covered.

If you’re new to budgeting and don’t know where to start, check out this list of things you need to include in your budget. I also have a great course covering the foundations of budgeting – Budgeting 101. In the course, I teach you how to make a budget that works for your income and how you can stick to it.

4. Reassess your budget.

It’s also a good idea to make a list of what to do if you make more than you anticipated. In general, the extra income can go towards your different financial goals. Prioritize this list, so you know where to put the extra money first.

As the month goes on, be sure to check in with your budget and see where you’re at. If you think you overestimated your income, you want to scale back your expenses as soon as possible rather than carry on the whole month with the wrong pretense of your income.

However, try not to increase your expenses if you notice you’ve made more than anticipated. Leave that to the end of the month and consult your priority list.

5. Have buffer room.

With variable income, you don’t get the traditional paydays. Since you don’t know when your money will be coming in, it can make paying bills and other payments on time stressful. This is why it’s a good idea to always have some buffer room in your checking account.

By having a buffer, you know that you’ll always have that money and don’t have to worry about the timing of when you’re getting paid. Your automatic payments and bills will always be covered.

The amount of your buffer will look different for everyone depending on your expenses. It should be enough to cover your average monthly expenses. When you get paid, replenish it to your set number and move any extra into your savings account.

I like to call my buffer my “income bucket”. Anything I make over my expenses goes here. If I have a low month earning-wise, I dip into my income bucket and use that excess to cover my expenses. You can see my exact method for this, and how I pay myself, in this quick video:

Note: this is not considered your emergency fund. An emergency fund should be in a high yield savings account that is out of sight and not in an account you spend from on a daily basis.

6. Increasing your income and decrease your expenses.

This goes for just about everyone, but especially for those with variable income sources. To prevent you from overspending and underearning, always be mindful about where your money is going and coming from.

Increasing your income doesn’t have to be drastic. Yes, there are plenty of side hustles, but sometimes you don’t have the time or energy to put into starting one.

Take a moment to brainstorm how you can increase your income. It can be as simple as selling the items in your home that you don’t have any use for or taking on one extra project a month.

On the other side, decreasing expenses means being more intentional about how you’re spending your money. Look at the highest items on your expenses and consider how you can bring them down. Groceries and eating out is a big one, as well as fun subscriptions such as boxes, music, and entertainment.

Eventually, you’ll find yourself with extra money you didn’t account for in your budget, getting you this much closer to your financial goal!

7. Plan for retirement.

For some, retirement may seem very far off. But it should always be a financial goal for everyone, no matter your age. With variable income, you may not have a retirement savings plan from an employer, which means saving for retirement falls completely into your hands.

You have a couple of options, with the first being a One-Participant 401(k) plan. Designed for sole proprietorships, you can contribute both as an employee and an employer to allow for higher contributions.

Second, a Simplified Employee Pension IRA (SEP-IRA) is similar to a traditional IRA. In a SEP IRA, you can make contributions up to a certain percentage of your compensation where the cap is adjusted annually.

That covers all my tips for managing a variable income! Remember that switching to a different type of income always takes some adjusting, so give yourself time to figure it all out. If you have had a variable income before, please leave your comments down below for everyone to benefit from. And if you’re new to it, feel free to leave your questions.

Want more help creating a realistic budget you can actually stick to? Check out my FREE guide below where I’ll show you how to budget the easy and simple way – even if you’re income is variable!

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