How to Make a Budget When You Have Variable Income

I mentioned a few weeks ago that my husband and I have variable monthly income. We are both freelancers. He has one regular client, who pays him in Euro, so the amount he makes every month varies widely based on the exchange rate.

I have several different clients, most of whom are based in the U.S., but projects ebb and flow, so my income varies a lot as well. As a result, we can fluctuate as much as $2,500+ from one month to the next. More typically, our income varies by at least $500 – $1000 per month.

A couple of you mentioned that you were in a similar spot and asked for my tips on making a budget work on variable income. I’m no budgeting guru, but I’m happy to share with you what we have learned to over the past two years of doing this.

Step 1: Get to know your numbers

The first and most important thing to making a variable budget work is taking charge of your numbers: What do you earn and what do you spend? When your income ebbs and flows every month or each season, you don’t have as much latitude to make mistakes.

For us, the three most critical pieces of data from the monthly income piece of the puzzle are:

1. The average that we earn over a year — this is the baseline upon which we make our budget

2. The lowest month in that year — this is the worst-case scenario, so all of our live-or-die essentials need to be at or below this number

3. The highest month in that year — this is our best-case scenario, so we do the most of our savings in this month

Step 2: Make a budget in order of priority

Usually when you make a budget, you divide it by category — food, housing, utilities, education, entertainment, etc. My recommendation for a variable budget is to make it based on priority instead.

If you are having your lowest earning month ever, you still need to pay your mortgage/rent, put gas in your car, feed your family, and cover the utilities. If you pay for your own health insurance premiums, you’ll need to do that, too. You won’t necessarily NEED to buy new clothes, recarpet your basement, go on vacation, or save for college.

Once you have a realistic working budget, take those numbers and prioritize them 1 through 100 (or however many items you have on your list). Draw a red line when you hit your lowest month income for a 12-month period. Draw a green line a few items down when you reach your average monthly income.

For me, this incredibly visual demarkation lets me really get a good handle on what we can — and cannot — afford to do with our money. If there are live-or-die essentials that fall below the red line, then I know we need to reduce or reprioritize the categories above that line.

Step 3: Set up a Variable Income Savings Account

Remember that green line for the average income? When we earn more than that green line, the first thing I do is fund our additional budget priorities — for us, that’s stuff like college, retirement, vacation sink fund, and car replacement sink fund.

If there is still money left-over, I send it to a dedicated savings account. I call it VIF (Variable Income Fund). This money sits and waits until we have a month BELOW the green line, so we can make a withdrawal and still fund our non-critical-yet-very-important expenses. For us, this is things like hair cuts, clothing, my computer replacement fund, car repair fund and family gift fund.

If there is no money in the VIF, the items between the red and green lines DON’T GET FUNDED. This isn’t the end of the world, but it’s a bummer. Which is why I like to put that over-and-above income into VIF.

Step 4: Get One Month Ahead

One of the most important things we do to stay on top of our variable income is to budget a month ahead.

For people who earn a fixed salary on the 1st (or 1st and 15th) of the month, they can safely budget that income to be spent in the same month — because they know how much that income will be!

With our variable income, we never know exactly how much we are going to earn in a month. Plus, we may invoice something but not get paid on it until several weeks — or months — later.

Therefore, we only budget based on actual check-in-hand money. And, most importantly, we base our budget for one month on the money we earned in the PREVIOUS month. That means that our December budget will be based on our November income.

When we sit down at the end of November to make our December plan, we know exactly how much money we have to spend. We’re not guessing — or hoping.

If you are currently living month-to-month, budgeting one month ahead will be a challenge at first. I suggest that you put aside a few hundred dollars a month if possible, with the goal of getting one month ahead within 6-12 months.

In many ways, being a month ahead is like having an extra month’s worth of expenses in our Emergency Fund. Huge swings in income still stink, but they don’t turn into full-blown crises since we have a month to plan for how to adjust our spending.

Do you budget based on variable income? What are your best tips and practices? I am sure that I’ve just scratched the surface here, so I look forward to hearing what you know as well!


  1. Our house is ‘blessed’ I will say not to have a variable income. Our financial life is slow and steady and predictable (as far as income). Being active duty, we are only paid once a month – which after 19 years we have become accustom to, but in the beginning it felt wrong that my salary was held for so long. I understand it is a way to cut costs. We actually get paid the first of the next month unless the first day of the month is a Sunday then they direct deposit a day ‘early’ on Saturday. In the lean early years we had to be certain we did get a month ahead quickly because there was no such things as every-other-Friday pay-day. The money had to get your though 31 days.

    The little variability I do experience come from deployments. The more often I deploy or if on foreign, hostile, or isolated soil the more I will be paid. We have NEVER counted on this money to live and always see it as a financial bonus to offset my time away from the family. Perhaps we will fund our charitable giving account, put the money toward a family treat, or stash away for the next vacation.

    • Dana – that makes a lot of sense. Your normal expenses — i.e. up to the green line in my “system” — are all covered by predictable income. And your “above and beyond” expenses get covered by the variable deployment income, when it’s available.

      (Personally, I don’t like to think about you making more money for being on hostile soil, though.)

  2. While my husbands salary is fixed, my income is variable. It has always been hard to budget, especially since his salary doesn’t quite cover the necessities.

    I use Quicken to budget and we work on a cash flow basis. I know that based on bills and expenses and income, at X date we need to have Y dollars available. I used to leave my income at $0 until I actually saw my paycheck, that way I knew how many hours I needed to work to cover our expenses. That wasn’t good for long term though, so now I have entered a minimum amount for each pay period. We make regular contributions to our savings account, which covers the deficit as necessary.

    I like your idea of budgeting a month ahead. I am going to to think about it and see if it will work for us (maybe after we get our tax refund).

  3. This is great – we’re having a spate of “below the green line” months so it’s going to take us a while. I do know where we’re headed now, and that’s liberating!

    • I’m sorry about the below the green line months – I hear you 🙁 But isn’t it wonderful to have a plan? Dave Ramsey always says it’ll feel like you got a raise. I wouldn’t always go that far, but it definitely makes life a lot less stressful!

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