Variable Income: Four Steps to Make It Work

  • Jun 19 2013

Are you trying to find excuses on why a zero based budget will not work? Well I will grant you that living on a variable income is a challenge. However it's for that reason a budget should be a bigger priority for you. Variable income and lack of discipline are the biggest reasons that we fail with budgets. This is compounded by current personal finance books skipping right over the concept of variable income budgets. The main problem stems from human nature in that we have the tendency to overspend on the good months and starve in the bad months. We here at Zero Based Budget HQ have regular 9-5 and side-jobs. Therefore we must employ this strategy for allocating variable income, so yes we live in this world. This method will help you use a zero based budget to smooth out the highs and lows of your variable income so you can crush it for all twelve months.

Use the following steps in making your zero based budget for variable income:

Step 1: Download & Open our FREE Zero Based Budget spreadsheet

Step 2: Conservatively Estimate your Monthly Variable Income

Self-Employment or Small Business: Figure out your projected net income and how much you want to leave in retained earnings. This can be accomplished by dividing the previous year's net income by 12, assuming that it was a typical year for your business. Next, determine a conservative percentage of net income. Base this on historical data and seasonal trends that you will distribute to yourself monthly. Only distribute the set percentage of net income monthly and then at the end of the year determine if any overage should be given as a bonus or reinvested into the business.

Base Salary & Commission: Attempt to live on your base salary and then use the commission bonus as extra payments to retirement, debt-free snowball, or a well-needed vacation.

Just Starting Out: Estimate at the low end of your projected income range. This is true if you are starting a new job or starting a side-business because if you are too pessimistic with your income then in this case you will come out ahead. It is often hard to judge income projections for a side-business. So what I have done in the past while operating a service based business, is to pay myself on a percentage basis (i.e. 25% for taxes, 10% for retained earnings, 15% for expenses, 50% for personal income/retirement funding).

Step 3: Input your Monthly Expenses

Step 4: Create a Savings Account or Business Account

If you have an awesome month then any additional money over what was budgeted that you receive will be held in this new account. If you have a slow month then you will use this account(s) to release a "paycheck" to yourself to even out your monthly income. Basically you are paying yourself a salary that is consistent for each month. If these accounts have a high balance at the end of the year, then give yourself a bonus and adjust your monthly income estimates for next year. As a side note, I would encourage you to create this account in a money market or some other account (Not a CD) that draws more than $.00001 in interest. Make your money work for you!

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