How to Budget with Variable Income

If you are a freelancer and have variable income, budgeting can be a particular challenge. Here’s what we do to accommodate our ever-changing monthly income.

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 basic essentials (mortgage, utilities, food, etc.) need to be at or less than 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.

Note: This is not the same thing as our Emergency Fund. The below the line expenses aren’t “emergencies” – and if we paid for them out of the Emergency Fund, we would no doubt encounter a bonafide emergency right around the corner. That’s why we need this secondary savings account.

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 January budget will be based on our December income.

When we sit down at the end of December to make our January 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. Great guide, Mara!
    My husband and I also depend on variable income.
    I am building up my marketing communications business and my husband is a construction project manager.
    This is new to me, so I am commenting because I want to be notified when others comment so I can learn more!

  2. We have a variable income but we do ours a little different. We put the amount that we have to work with at the top. Then we start with our mortgage and pay the most important bills after that then we stop when we run out of money. Then if we get another check we start where we left off and add in an amount that we want to save. That becomes our first bill on the next check. This way our savings and important bills are paid!

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