2694: How Do I Budget with a Variable Income? by Laura Gariepy of Women Who Money on Personal Financial Planning

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[00:01:04] This is Optimal Finance Daily, episode 2694.

[00:01:07] How Do I Budget With a Variable Income?

[00:01:10] By Laura Garripee with womenwhomoney.com.

[00:01:14] And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:18] Now let's get right to it and continue optimizing your life.

[00:01:25] How Do I Budget With a Variable Income?

[00:01:28] By Laura Garripee with womenwhomoney.com.

[00:01:32] Everywhere you turn, you hear having a budget is the first piece of the financial

[00:01:36] stability puzzle.

[00:01:37] But how do you create a budget when your income varies month to month?

[00:01:41] If you're self-employed or only earn commission, you know one month you can

[00:01:45] make it rain and the next you're in a drought.

[00:01:48] But fear not, variable income earners.

[00:01:51] Budgeting is possible with the right strategy.

[00:01:54] By following the upcoming steps, you'll be well on your way to shoring up your

[00:01:57] financial house.

[00:02:00] Preparing a budget on a variable income.

[00:02:03] Successful use of a budget gets your money working for you so you can attain

[00:02:06] your financial goals.

[00:02:08] It'll take some time to reach your goals, but you'll get there much faster

[00:02:11] with a sound strategy.

[00:02:13] You can use a pencil and notebook, a spreadsheet or an app to build a

[00:02:17] budget.

[00:02:18] Just use something you're comfortable with.

[00:02:21] Set Your Foundation.

[00:02:23] Even though your income may fluctuate wildly from month to month, your

[00:02:27] expenses should remain relatively stable.

[00:02:29] Review the last few months of spending and determine how much your

[00:02:32] absolute essentials cost you.

[00:02:35] This tally includes housing, utilities, groceries, medicine, insurance,

[00:02:40] transportation to work, and minimum debt payments.

[00:02:43] This number is your threshold.

[00:02:45] It's the amount you must earn per month without robbing your piggy bank

[00:02:48] or taking on additional debt.

[00:02:51] Next, add up your discretionary purchases, like eating out, shopping,

[00:02:55] entertainment or saving and investing.

[00:02:58] These are your nice to have expenses you can cut during lean months.

[00:03:02] Of course, the ultimate goal is to reach a point of stability so that

[00:03:05] saving and investing becomes a part of your essential expenses.

[00:03:09] Knowing both your real bottom line or threshold and your preferred

[00:03:14] bottom line will establish and maintain financial priorities.

[00:03:18] It can also serve as great motivation to earn more because

[00:03:21] richer months will undoubtedly be a lot more productive and fun.

[00:03:26] Utilize Multiple Accounts.

[00:03:28] Effective cash management takes discipline.

[00:03:31] And let's face it, many folks aren't up to the task.

[00:03:34] To make fiscal prudence easier, set up multiple accounts to avoid

[00:03:38] spending money you shouldn't.

[00:03:40] You need a checking account for daily purchases and paying bills.

[00:03:44] But you should also have a savings account or cushion account where

[00:03:46] you bank extra cash during your more profitable variable income months.

[00:03:51] These funds will accumulate and become a cushion to draw from during lean times.

[00:03:56] You could use this cushion account as an emergency fund too,

[00:03:59] unless you want that money stored elsewhere.

[00:04:02] Additionally, if you're a freelancer or own a business,

[00:04:04] consider having an account specifically to squirrel away money to pay your taxes.

[00:04:09] Finally, once you've hit your money stride, have separate savings or

[00:04:13] investment accounts for goals like paying off debt, buying a house or

[00:04:16] enjoying retirement.

[00:04:18] Optimize Expenses.

[00:04:21] As you're taking a good hard look at your spending,

[00:04:23] take note of anything you can cut or reduce now.

[00:04:27] By lowering your expenses, you lessen the pressure to earn or

[00:04:30] end up with a greater surplus of funds you can use to achieve your goals faster.

[00:04:35] Tweaking your expenditures is a continuous process.

[00:04:38] So don't feel compelled to change everything all at once,

[00:04:41] unless that's your style.

[00:04:43] Start by choosing one expense like groceries and research ways to spend less.

[00:04:48] In this instance, you could plan and prep your meals,

[00:04:51] use coupons, buy store brand goods or try to shop sales.

[00:04:56] Once you have a handle on that expense, choose another and repeat the process.

[00:05:01] You can make slight changes, resisting lattes or cutting your hair,

[00:05:05] or you can go more drastic like selling your car or

[00:05:07] moving to a lower cost of living area.

[00:05:10] Do whatever makes the most sense for your situation.

[00:05:14] Diversify Your Income Streams.

[00:05:17] If you're having a hard time making ends meet,

[00:05:19] consider starting a side hustle or taking on a part-time job.

[00:05:22] This doesn't have to be permanent, only until your other variable income sources

[00:05:27] yields more cash flow or you have a sufficient cushion saved.

[00:05:31] Of course, continued income diversification has many benefits,

[00:05:35] like reducing risk from losing one money source and

[00:05:37] helping you achieve your financial goals faster.

[00:05:40] Managing Your Money.

[00:05:42] Once your cushion account can cover a few months of expenses,

[00:05:46] it now benefits your main account.

[00:05:48] All income should be placed in it and funneled from here into other accounts.

[00:05:52] At the start of each month, move only what you need to cover your threshold

[00:05:56] budget and your typical preferred expenses from your cushion account

[00:05:59] into your checking account.

[00:06:01] This will likely be the same amount month to month unless your expenses change.

[00:06:06] With all of your varied earnings now routed directly into your cushion account,

[00:06:10] they'll replace what you've withdrawn for expenses and

[00:06:13] hopefully boosting the balance rapidly with your success.

[00:06:17] This process is sometimes called living on last month's income or a zero sum budget.

[00:06:23] The goal is to end the month with next to nothing in your checking account but

[00:06:27] plenty in your cushion account.

[00:06:29] That means your budget is accurate.

[00:06:31] As your primary savings or

[00:06:33] cushion account accumulates surplus funds, you can then direct some of the money to

[00:06:37] your other savings goals.

[00:06:40] Refine the process.

[00:06:42] As is the case with any budget, yours isn't meant to be set and forget.

[00:06:46] Your financial situation is dynamic, hopefully always in a positive way.

[00:06:51] As your variable income expenses, savings balances, and

[00:06:55] debt level changes, your budget should be adjusted accordingly.

[00:06:59] This will keep you on sound fiscal footing, moving

[00:07:02] incrementally towards achieving your goals.

[00:07:06] Final thoughts on budgeting with variable income.

[00:07:09] Improperly managed variable income can lead to severe financial stress.

[00:07:14] However, by working through the steps in this article,

[00:07:17] you can find stability using a budget.

[00:07:19] Before long, you'll be in the same or

[00:07:21] better boat as your regular salary earning peers.

[00:07:29] You just listened to the post titled,

[00:07:31] How Do I Budget With a Variable Income?

[00:07:33] by Laura Garapy with womenwhomoney.com.

[00:07:37] And I'll be right back with my commentary.

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[00:09:46] Budgeting on a variable income can be tough

[00:09:49] but it's not impossible.

[00:09:50] The key for me has been to be hyper aware of my

[00:09:53] expenses and to have a long runway in terms of savings

[00:09:56] that I can pull from and replenish when money does come in.

[00:10:00] But if you don't have a long runway or buffer to help

[00:10:02] manage risk, I think being really clear in advance

[00:10:06] on where the money needs to go when it comes in

[00:10:08] will help combat the temptation when you're

[00:10:10] holding a big check.

[00:10:12] I had a friend who shared with me that they set

[00:10:14] themselves up to receive regular paychecks

[00:10:17] because psychologically it helped them not blow

[00:10:19] all their money.

[00:10:20] So she would get a big check that she needed to last

[00:10:22] for three months.

[00:10:24] She deposited it into a savings account and then

[00:10:26] scheduled automatic transfers into her checking

[00:10:28] account every two weeks so it felt like she was

[00:10:31] getting a regular paycheck.

[00:10:32] This allowed her to not have to look at the larger

[00:10:35] amount of money and keep her spending decisions

[00:10:37] focused on what she had in her checking account.

[00:10:41] But that should do it for today.

[00:10:42] Have a great rest of your day and I'll see you

[00:10:44] back here tomorrow where optimal life awaits.