2968: How to Budget on a Variable Income by Jen Hayes on Reducing and Managing Financial Stress

[00:00:00] Brauchen wir wirklich noch einen Computer? Alle wahrscheinlich nicht. Aber wenn du Musik mit der Power eines Neuralprozessors neu erfindest oder unterwegs Migrationsmuster mit einem ganztägigen Akku analysierst oder deine Ideen mit dem KI-gesteuerten Co-Creator zum Leben erwächst, dann kann ein Co-Pilot Plus PC einen Unterschied machen. Nicht alle brauchen einen leistungsstärkeren KI-Computer. Aber wenn du versuchst, die Welt zu verändern, auch wenn es nur deine eigene ist, haben wir einen für dich entwickelt. Microsoft Co-Pilot Plus PC mit Snapdragon. Die bisher schnellsten und intelligentesten Windows-PCs. Die Akkulaufzeit variiert hier nach Nutzung und Einstellungen.

[00:00:30] This is Optimal Finance Daily. How to Budget on a Variable Income by Jen Hayes of JenHayes.me

[00:00:38] As a personal finance blogger, I get a lot of questions from readers about how to budget on a variable income. Budgeting is hard enough for most people. Throw in an income that varies wildly from month to month and it's no wonder people get frustrated with trying to find a budget that works.

[00:00:54] There are three different options I would recommend for those of you who are trying to budget on a variable income.

[00:01:01] Number one, living on last month's income. Number two, budgeting from paycheck to paycheck. And number three, estimating your worst month and creating a bare bones budget based on that.

[00:01:13] I'm a big believer that what's right for one person isn't necessarily right for another. We all have our own unique journey.

[00:01:21] What makes sense for a freelancer who has no clue what her income is going to be might be very different from what a salesperson should do if he has some insight into what his commission might be next month.

[00:01:31] Let's examine each of the three options.

[00:01:35] Living on last month's income.

[00:01:38] This option is my preferred method. If you budget using last month's income, you know exactly how much money you have.

[00:01:45] So how do you budget this way?

[00:01:47] First, put $1,000 into an emergency fund. Pay off any debt you have next.

[00:01:53] And lastly, create a checking account buffer.

[00:01:56] Once your buffer equals one month's total budget, you're ready to begin.

[00:02:01] Budgeting using last month's income is smart because one, it simplifies the budgeting process.

[00:02:07] You don't have to estimate how much money you'll earn. You already know what you have.

[00:02:12] Two, it reduces financial stress.

[00:02:14] You don't have to worry about falling behind or timing your bills based on when you receive your paychecks.

[00:02:20] And three, it encourages you to spend less than you actually earn, assuming you earned less last month.

[00:02:27] Budgeting paycheck to paycheck.

[00:02:29] This is an option I'd recommend for someone who has some insight into what his or her pay will be in the future.

[00:02:36] Let's say you earn a salary every two weeks and you also earn a commission once per month for the prior month.

[00:02:42] Maybe your commission is paid out on January 25th, but you'll earn that commission in December.

[00:02:48] By the end of December, you might know exactly what your January 25th commission will be,

[00:02:53] or perhaps you'll at least be able to estimate it based on how well you or your company did in December.

[00:02:59] If that sounds like you, congrats.

[00:03:02] You'll be able to budget much more precisely since you do have some insight into how much money you'll be making.

[00:03:08] In this situation, I'd advise creating a budget for each paycheck.

[00:03:12] You can create a budget for your salary checks, which don't change.

[00:03:15] This budget should include your most important bills, or all of your bills, if it's enough to cover all of them.

[00:03:21] If you can't cover all of your bills with your salary, start with the highest priority ones like your rent or mortgage, groceries, and transportation.

[00:03:28] Once you know what your commission will be, create a budget for the commission check.

[00:03:33] This would include your less important bills, possibly, as well as any discretionary spending and or extra amounts that you're putting towards paying off debt or building savings, depending on your current financial goals.

[00:03:45] If you don't know exactly what your commission will be, but you have a good idea, use the lowest amount you think your commission could be to create the budget.

[00:03:53] Let's say you think your commission could be anywhere from $2,000 to $3,000.

[00:03:58] Use $2,000 to create the budget.

[00:04:01] If it ends up being $3,000, you can use that extra $1,000 for savings or paying off debt.

[00:04:06] Decide what any extra amount will go towards ahead of time so you're not tempted to blow it.

[00:04:12] Estimating your worst month.

[00:04:14] Let's say you're a full-time freelancer and your income varies from $3,500 to $10,000 per month.

[00:04:21] How do you budget when it varies that drastically and you have no way of knowing what will be in advance?

[00:04:26] The answer is to use your worst month's income.

[00:04:29] If the worst month you've had as a freelancer netted you $3,500, use $3,500 to create your budget.

[00:04:37] You'll start with covering your basics like food and bills.

[00:04:40] Next, make a list of lower priority items.

[00:04:43] If you earn, say, $4,000, you can use that extra $500 on the lower priority categories of your budget.

[00:04:50] If you earn $10,000, that extra $6,500 should go towards a goal such as paying down debt or saving for retirement.

[00:04:59] Budgeting on a variable income.

[00:05:02] Budgeting on an inconsistent income isn't impossible.

[00:05:05] If your income varies from month to month, try one of the strategies outlined to create your budget.

[00:05:25] Budgeting on a variable income can be tough, but I agree with Jen that it's not impossible.

[00:05:30] I have a tiny bit of insight here as I left my full-time job and I'm currently pursuing self-employment.

[00:05:36] The key for me has been to be hyper aware of my expenses and to have a long runway in terms of savings that I can pull from and replenish when money does come in.

[00:05:47] Because I've tracked my spending for years, I know that on average I spend about $3,000 per month and half of that is for fixed expenses.

[00:05:57] I'm monitoring my spending closely to make sure that I stay under budget and I'm keeping track of how quickly I'm able to replenish my runway.

[00:06:06] If I see that my long runway is starting to diminish at a quicker rate, that's my cue that I need to double down on increasing my income long before it turns into a paycheck-to-paycheck situation.

[00:06:18] But if you don't have a long runway or buffer to help manage risk, I think being really clear in advance on where the money needs to go when it comes in will help combat temptation when you're holding a big check.

[00:06:31] I had a friend who shared with me that they set themselves up to receive regular paychecks because psychologically it helped them not blow all their money.

[00:06:40] So she would get a big check that needed to last for three months.

[00:06:44] She'd deposit it into a savings account and then schedule automatic transfers to her checking account every two weeks so it felt like she was getting a regular paycheck.

[00:06:54] This allowed her to not have to look at that larger amount of money and to keep her spending decisions focused on what she had in her checking account.

[00:07:03] And that will do it for today.

[00:07:05] Have a great day and start to your weekend if you're listening in real time.

[00:07:08] And I'll be back here over the weekend where your optimal life awaits.

[00:07:12] And I'll be back here.