Budgeting with Variable Income - Part Two

Part Two: How to save when there's more month than money.

Budgeting with Variable Income - Part Two

Part One: Manage your money like a full-time employee.

It’s difficult to plan your monthly spending when you don’t know what kind of month it will be until the end - when it’s too late to adjust your spending. So, for self-employed and commission or contract workers, the safer approach is to live off of the income earned the prior month. Here’s how:

Pay yourself a salary.

Once you’ve created a budget of only monthly essentials and discretionary spending, you’ll know exactly how much money you need to make it through the month without dipping into savings. On the first of the next month, deposit that amount of money into your regular checking account – and nothing else.

This takes your flexible income and transforms it into a steady wage. If there’s nothing leftover, then you’re still spending more than you’re making. If there is a surplus, it can stay safe in a separate account, where in the past it may have been used for unplanned spending.

Pay your bills bimonthly.

Just like a worker with steady wages, it’s a good idea to pay your bills around the first and 15th of each month:

1st - pay everything you know about and can pay ahead of time

15th - pay everything due by the end of the month, or that came in during the first 2 weeks of the month

Pay debt and set aside savings too.

Depending on your current debt and savings goals, there may be a few ways to think about paying down debt vs. accumulating savings. Here’s an approach that might work for you:

  1. Make sure you have a roof over your head and food on the table.
  2. Once your house is in order, save what you can.
  3. Pay down debt - start with the debt with the highest annual percentage rate (APR) first and move down the line.
  4. Save even more - after you save three to six months of expenses increase your long-term savings and investments.

Monitor discretionary spending to find more savings.

Since you’ve estimated some expenses like groceries and entertainment, you’ll need to monitor spending in those categories to make sure you don’t go over your budget. If you haven’t lived with a budget before, it might be hard to navigate unplanned purchases. So, plan for biannual or irregular expenses like car insurance or home repairs. But if you do get the hang of it, you may be able to find even more places to save.

Finally, put your savings to work.

Unless your savings account is paying a decent-sized interest rate, you’re losing money by letting too much cash sit idle. Figure out how much extra money you’re accumulating every few months and start putting those funds toward debt, long-term savings and even retirement.