5 Steps for Budgeting If Your Income Changes From Month to Month

A woman works as a bartender.
Tara Frenck, 34, who works as a bartender at Cycle Brewing in St. Petersburg, Fla., has tried a variety of methods to keep herself on budget during her more than 15 years in the service industry. Aileen Perilla/ The Penny Hoarder

Budgeting is difficult no matter what you make or how predictable your salary is.

But it can be even harder if your income fluctuates month to month based on commission, sales, tips or how many shifts you’re given.

If you’re having trouble budgeting with an irregular paycheck, don’t give up. Here are five steps to budgeting if you have a variable income.

How to Budget With a Variable Income

As you would with any budget, you’ll need to figure out what comes in and make what’s going out fit your needs. Even with an irregular income, there are only a few tweaks to the system.

1. Average Out Your Yearly and Monthly Income

A lot of jobs — whether in sales or hospitality — pay an hourly rate. If it’s significant, you can use that as your baseline.

Then, go through your bank statements for the past year and calculate what you made in commission and tips every month.

This will be easier if you’ve been in your current position for over a year. If you haven’t, calculate it for the months you can, and ask your co-workers about how and when their income fluctuates.

The goal is to have a realistic prediction of the minimum you should take home each month of the year.

2. Determine Your Monthly Sinking Fund Requirements

Because your expenses likely won’t change month to month like your income, it’s important to save during your high-earning months, so that you can pull from those savings in the sparse months — kind of like an income sinking fund.

Tara Frenck, a bartender at a brewery in St. Petersburg, Florida, has a noticeable high season and low season. Frenck tries to save 20% of her income every week to cover unexpected expenses — and even more than that in the busy season.

“It’s taken some years of practice and saving, but at this point, I have not had to go without anything that I need or want, although my wants aren’t much,” she said.

Once you have your annual and monthly numbers, divide your annual projected income by 12 to get your monthly average. Calculate the difference between your monthly average and your expected income for every month.

You’ll get either a positive or negative number. A positive number is the minimum you need to save in that month; a negative is the maximum you can pull from your income sinking fund.

A hand pulls on a beer spigot.
Frenck evens out her cash flow by depositing most of her $20 bills and using the others for petty cash. She also plans any trips or vacations for slow seasons, when she wouldn’t make as much working. Aileen Perilla/ The Penny Hoarder

3. List Your Monthly Expenses

Now, go through your bank statements and list all of your expenses, no matter how small. Start with the last three months, then add annual or biannual expenses like insurance and car registration.

List your sinking funds as well. In addition to your income sinking fund, everyone needs an emergency fund for surprise expenses. Other potential saving options include a medical fund, car fund, Christmas gift fund and pet fund.

Most of your monthly expenses will vary month to month, at least by a little bit. You can average them the same way you average your income.

Sometimes, companies will do this for you. Many energy companies offer a free budget billing payment option that automatically averages your usage and gives you a set bill every month.

When you’re listing expenses, be as thorough as possible. Some commonly forgotten budget categories include tolls, technology replacements, professional memberships and fees, home and lawn maintenance, haircuts and ride-sharing costs.

4. Separate and Order Expenses Based on Importance

Once you’ve laid them all out, separate necessary and discretionary expenses. Necessary means essential to surviving now or in the future. Discretionary expenses are any additional expenses that enrich your life but aren’t necessary for survival.

After separating your expenses, it’s time to prioritize. The most important things to survival are food, water, utilities, a roof over your head and the ability to work. So your first priorities should look something like this:

  • Housing (i.e., rent or mortgage).
  • Groceries.
  • Water/utilities.
  • Electricity.
  • Transportation (car payment, bus pass, etc.).
  • Uniforms/work clothes.

Next should be savings — namely, transferring your monthly surplus to a high-yield savings account or pulling your surplus from one. Aim for at least $1,000 in an emergency fund. How much you save beyond that figure will depend on where you are financially and your personal preference.

Assign values to each saving category based on your spending toward your sinking fund and minimum debt payments. Try to take advantage of any 401(k) match your employer offers, and make IRA contributions if you’re able. So your savings might look something like this:

  • Emergency fund.
  • Debt payments.
  • Sinking funds.
  • Retirement savings.

That’s typically the extent of necessary expenses. What you bring in monthly needs to at least cover these costs, ideally even during your lowest income months. Then you can prioritize all your discretionary expenses in the order you see fit.

5. Budget for Discretionary Expenses

Once all your priority expenses are listed, you’ll need to add values to your discretionary expenses. Use the zero-based budgeting approach to make sure your priorities are funded, and give realistic values to everything else. Here’s how to do it.

Once all the necessities are paid for, you’ll go down your list of discretionary expenses as you have extra income and fund each category until you’re at zero.

So, let’s say part of your discretionary budget looks like this:

  • Gym membership: $33
  • Coffee: $20
  • Restaurants: $100

If you’ve funded all your categories above that and you have $100 left, you can pay for your gym and coffee addictions and you’ll have $47 for restaurants that month. If there are any items below restaurants, they’ll have to wait to be funded until next month (or next paycheck).

Budgeting on an irregular income allows you to maintain a quality of life that’s not as dependent on the ebbs and flows of a business. Frenck deposits most of her $20 bills and uses the other bills for petty cash. It’s just one way she evens out her cash flow. She also changes up how she spends her free time throughout the year.

“I do enjoy the occasional fine-dining experience — say, once a week in the good season, not so much in the slow,” Frenck said. “I also try to plan any trips or vacations in the slow seasons, knowing I wouldn’t be making as much working during that time.”

Whatever you’re trying to save for travel or another financial goal, a budget — even an irregular one — will help you get there.

Jen Smith is a former staff writer at The Penny Hoarder.