One of the most difficult budgeting problems for families with fluctuating incomes, such as those whose salary is based on commission sales, is knowing how to allocate monthly spending.

The normal tendency is to spend the money as it comes in. This works great during the high-income months, but it usually causes havoc during the lower-income months. Living on a fluctuating income can be very deceiving—and difficult. However, families with fluctuating incomes need budgets even more than families on fixed salaries.

Many people on variable incomes get trapped into debt because they borrow during lean months and spend what they make during high-income months rather than repay what they had borrowed. However, to help you escape the financial challenges that might come, some tips and expert advice are provided in this article.

• How do you Budget when Income Fluctuates?
• What is the Meaning of Fluctuating Income?
• What is the Most Difficult part of Budgeting?
• How you should Budget your Income?
• How do you Budget with no Income?
• What are some Reasons a Budget can Fail?
• What can Affect a Budget?

How do you Budget when Income Fluctuates?

You might think a monthly budget only works for people with a predictable income. But a budget allows you to tell your money where to go instead of wondering where it went—and that applies to people who live on a fluctuating income, too

Read Also: What you Should know about Impulsive and Compulsive Spending

The tips below will show you exactly how to create and work a budget if you’re living on a fluctuating income. And don’t worry—it isn’t as intimidating as it sounds.

1. Start with your lowest monthly estimate

It’s easier to start with your lowest monthly income than to start with an average. If you budget for the smallest amount, you can always go up from there! Check out your paystubs from the last year and find the lowest one in the bunch. If this is your first time working on commission or living on an irregular income, estimate what your lowest month will look like.

2. Create your budget based on that number.

Take your lowest monthly income and use it to create your budget. Remember: You want to start with the lowest number because it’s easier to add money in the budget than deduct it.

Now prioritize your categories, starting with your four essentials—also known as your basic necessities:

• Food. Begin with your basic food needs, like weekly grocery trips. We’ll add the extras—like restaurants and coffee shops—later!
• Shelter. This includes your rent or mortgage payment, as well as any cost associated with living in your home (utilities, taxes and insurance).
• Clothing. Remember, we’re starting with basics. Focus on what you need, not the shopping spree you’ve always wanted. That comes later!
• Transportation. This can include your car payment, how much you spend on gas, and what you need to maintain your vehicle.

Once you’ve listed your four essentials, list the rest of your expenses in order of most important to least important. Make sure to include giving and savings after the essentials—and don’t forget to include insurance. If you accidentally list some of your expenses out of order, don’t worry. You can rearrange your budget categories when you’re done.

And remember—just because you have an irregular income doesn’t mean you can’t have fun! But when you’re setting up your initial budget, cover your necessities first before diving into all the extra stuff. Once you have your basics covered, you can add in things like restaurants, coffee, entertainment, and other fun activities!

3. Adjust over the course of the month.

Now that you’ve created a budget for your lowest monthly income, take it for a test drive. You might realize halfway through the month that you’re going to make more than you originally thought.

That’s great news! But before you start spending that extra cash, make sure you add it into your budget. If you set your lowest monthly income to $5,000 but you made $5,500, simply adjust the income line in your EveryDollar budget.

Now you just need to decide where to apply that extra money—and that’s a great problem to have! You can go back to the priorities you listed, or add new ones. It’s up to you!

4. Create a Hill and Valley fund.

There are hills and valleys in every business. Sometimes you bring in more than average, and that’s great. But sometimes you experience a slow season, and you need to pull from savings to make ends meet until business picks up again.

That’s where the Hill and Valley fund comes in.

The Hill and Valley fund prevents you from dipping into your emergency fund when your paycheck is smaller than you thought it would be. It helps you pay your bills and keep food on the table when your monthly income is less than your monthly expenses.

It’s easy to get started. Remember the above example where we talked about adjusting your income for the better when you have a good month? When that happens, allocate some of your extra earnings to the Hill and Valley fund. Easy as pie.

Over time, the Hill and Valley fund will grow—just like an emergency fund. It may be tempting, but don’t skip this step. It will provide a nice buffer between you and those hard months when business slows down or you need to work less for a season!

5. Copy your planned amount to next month.

Once you have a list of monthly expenses and your Hill and Valley fund, you can use this budget as a template for the next month. Let EveryDollar do the work for you. It will copy the previous month’s budget into the new month, and you can make any necessary adjustments from there without creating a new budget from scratch.

What is the Meaning of Fluctuating Income?

Irregular income means that the income you receive as an individual or business comes in uneven increments. Some months, your income might be high, and for others, it will be low. If you or your business receives irregular income, you can take steps to help budget for future periods. Since expenses usually occur with regularity, you should make sure you have enough income set aside during lean months to pay them.

This type of income structure can mean a lot of different things for your financial life. It can mean you have times of great abundance and conversely it can mean months of barely making it. What it surely doesn’t mean is that you have a steady, regular financial life. There is nothing simple about living on a fluctuating income.

Your first step to a more even financial life is to know what you are working with. It’s human nature to keep your eyes focused forward, but stopping to take a look back is the right place to start. So turn around and assess your financial year by asking and answering these four questions:

Over the last 12 months what was your income each month?

For those 12 months what was your average monthly pay?

What was the highest month?

What was the lowest month?

By knowing your numbers you start to see a clearer picture of your income. Do you see any seasonal patterns arise? What about when major dips or major leaps occur? A similar and equally interesting study would be to do the same exercise with your expenses. Beyond fixed expenses are you spending the same amount each month, or are your expenses following your income?

Living on a commission income doesn’t mean you have an excuse not to budget, it’s the opposite really. You need budgeting EVEN MORE than a salaried person. Your rising and falling income require careful planning.

What is the Most Difficult part of Budgeting?

Creating a budget is easy when it’s for your own household. But when that budget is for your business with multiple expense categories and a variety of decision makers, things can get a little complicated.

Here are a few challenges you’ll face when building a budget for your business:

Your information is inaccurate. The larger a business becomes, the more challenging it is to pull in the right information. With multiple departments spending money in various ways, you may find that the numbers in your budget don’t reflect how money will actually be spent.

You don’t have the right tools. There are plenty of software platforms that can help you create and analyze your budget, but finding the right one in a sea of choices can be tough.

Budgeting takes time, and time is money. Adding to any other budget difficulty you could possibly have is the fact that you simply must take time out of your busy schedule to put the budget together. Even if you have a staff member who takes care of it, that’s time that could be allocated to other duties.

A budget is only as useful as you make it. If you create a budget every year and set it aside, it won’t help your business at all. It’s important that you not only follow that budget closely throughout the year but pay close attention to how accurate your forecasting was. Otherwise, you’re simply wasting valuable time.

How you should Budget your Income?

1. Keep records of income

You are required to have a sound knowledge of your income and expenses in order to create a reasonable budget for your finances. This can easily be achieved if you keep effective records of your earnings. As a full-time, part-time or commission-based earner, you need to have a grasp of how much you earn over a given period of time. This will help to regulate budget planning and assist in determining how much is allocated to meet different needs.

2. Set financial goals

One of the essential components of budgeting is the setting of financial goals. Financial goals tell what you intend to achieve with your income. These goals can be categorised into three groups which are:

• Short term goal which can be within one year.
• Midterm goals which can be between one to two years.
• Long term goals which can be from two years and more.

Once you have identified your goals, it becomes easier to keep track of your progress towards achieving them. When budgeting on an unstable income, financial goals will help you utilise your finances effectively. Short term goals can be reviewed regularly and addressed as finances flow in at different times while long term goals can be saved up for.

3. Prioritise necessities

As your financial goals are been written down, you should take into consideration how necessary or needful they are. Some fixed essential expenses like rent can fall under mid-term goals while some variable expenses like feeding, clothing, transportation, and others which are also essential can be written down as short term goals. Regardless of if they are fixed or changing, these essential expenses are necessities that should be prioritised when making a budget.

4. Diversify your earnings

A little here, a little there, when collected together, they can make a greater whole. Having diverse streams of income can lessen the pressure of meeting certain financial plans which makes budgeting more achievable. Living on an unstable income has its moment of ups and downs.

There are periods of high income and low income as well. Diversifying your earnings will help to make up for those periods of low income. These diverse streams of income can either be budgeted for separately or collectively.

5. Incorporate spending and saving plans

To meet some needs that might pop up or some needs that may take a long period of time to be met, it is important to have a savings plan properly incorporated in the budget. One might be wondering how to save up with an income that cannot be predicted. This is where making plans with an estimate comes in.

Look over the previous months, make an estimate of what should be coming in next and allocate it into savings and spending plan. This estimate can be adjusted as time goes on based on the flow of income but your budget should treat your saving as important as your expenses.

How do you Budget with no Income?

having a budget is even more critical when you don’t have a steady income. Having a budget allows you to prioritize expenses and maintain control of your finances. Having this control can help you to stay out of debt, be prepared for emergencies, save for the future, and build a stronger financial foundation for when you do have a steadier income.

Here are a few rules to follow that will get you started.

1. Know Your Baseline

The first thing you need to do to create a budget is to know your baseline in terms of expenses. Even if you’re living at home and not paying rent, you are still spending money.

Whether it’s the latte you buy at Starbucks while you’re sending out resumes, travel expenses to and from interviews, or the occasional meal out with friends. Everything counts.

2. Assess Your Income

Next, assess your income. Even if you’re not fully employed, you may have savings, part-time work, or “gigs” that provide you with some income. Even if these are unsteady, try to assess how much you are bringing in each month. Make sure that you make your determination based on what you’re making now, not what you hope to make in the future.

3. Look for Places to Save

As you review your expenses, try looking for places to save. Need a cup of coffee to start your day? Trying brewing it at home, and working at the library. Look through your credit card statement, if there are recurring fees for subscription services or memberships that you aren’t actively using, cancel them. You can always rejoin later.

Take the savings you find, and apply it toward your income, or better yet, use it to start a saving’s fund.

4. Write Yourself a Paycheck

Once you’ve determined what you honestly need to spend each month, create your budget based on that number. Then “pay” yourself that amount each month. If you find you’re making more one month, don’t be tempted to spend it. Instead, set aside the extra and put it into savings. That way if you find there’s a shortfall in future months, you’ll have the resources to help cover the difference.

One good way to juggle your balances is to open up additional savings accounts. Deposit your earnings there and then “pay” yourself from the account.

What are some Reasons a Budget can Fail?

There are many reasons for the budget breakdown. The numbers may not match up, or you may simply be spending more than you budgeted for. Here are some of the common reasons budgets don’t work, along with ways you can get your budget back on track.

1. You Haven’t Given It Enough Time

Budgets usually tackle spending and debt issues with long-term plans, and they rarely have an immediate effect. If you’re a few months in and you haven’t noticed an impact, you might simply need to be patient. What you can do in these first few months is reassess your budget and make adjustments as you learn more about your actual income and expenses.

2. Your Expenses Are Higher Than Your Income

If your net income (income minus expenses) is a negative number, then you’re spending more money than you make. The problem isn’t the budget, it’s your spending. Review each spending category and figure out which ones you can cut back on.

This can be a difficult exercise, especially if you’re overspending in areas that make you feel comfortable. However, learning to live within your means will put you in a much better financial position.

3. You Don’t Have Enough Money Budgeted for Some Categories

It’s easy to underestimate how much you’ll spend on some categories, especially costs like food and gas that can vary greatly from one month to the next. If you see that you’re consistently overspending your budget in those categories, you might need to increase the budget for those areas. Remember that it could mean cutting back your spending in other places to keep from going over budget.

4. You Aren’t Sticking to It

You have to actually use your budget if you want it to work. Don’t just write the numbers on a piece of paper, stick it in a drawer, and forget about it. Refer to your budget frequently throughout the month. Track your spending and compare it to what you’ve budgeted to see how you’re doing.

5. You Didn’t Leave Any Room for Fun

Living on a budget doesn’t mean you can’t enjoy your usual hobbies and entertainment. In fact, you may find that you have an easier time sticking to a budget if you decide ahead of time how much you’re going to spend on recreation. Cutting out all the fun will make you resent budgeting—that’s not the goal, and it increases the chances of you scrapping the budget altogether. Keep it reasonable. You can still have fun without blowing your budget.

6. You’re Focused More on the Tool Than the Plan

A successful budget doesn’t require the latest spreadsheet or financial software. It might be fun trying out new apps, but you could jot down your budget on a napkin and make it just as effective as any electronic budgeting tool.

If you’re getting to distracted by the software, go analog for a few weeks then catch up in the app at the end of the month. On the other hand, if your budgeting tool is making you hate budgeting, look for alternative budgeting tactics. Print a few copies of this printable budget worksheet to get you started.

7. You Aren’t Adjusting It

A budget isn’t a legally binding contract that can never be changed. On the contrary, you should adjust your budget from time to time, especially in the beginning as you learn more about your spending habits and real income. If your income or expenses change, make sure your budget reflects the changes. Major life changes like a marriage, divorce, or the birth of a child will require a similarly substantial budget adjustment. ​

8. You Aren’t Practicing Self-Discipline

Sticking to your budget will require you to say “no” to some unplanned purchases. If you’ve got your eye on a big purchase, forgo it at least as long as it takes to check your budget and see if you can afford it. Practice self-discipline and delay some purchases, especially if you haven’t explicitly budgeted for them.

9. You’re Cheating

A diet won’t help you lose weight if you cheat on it, and the same goes for a budget. It’s common for novice budgeters to overstate their income or understate their expenses. The problem is, no one is going to punish you for cheating on your budget, but that doesn’t mean there aren’t consequences.

Instead, the consequences will silently pile up until they get to a point you can’t ignore, forcing you to dip into savings to pay for regular bills or deal with debt collectors.

10. You Forgot to Include Some Expenses

If you don’t include every expense in your budget, it can seem broken when you compare your spending to your income at the end of the month. Use canceled checks, online banking services, and ATM withdrawal receipts to capture all your expenses.

11. You Didn’t Budget for Annual Expenses

Not all your bills have monthly due dates. Some bills, like insurance premiums or property taxes, are only due once a year. If you don’t include these expenses in your budget, they’ll take you by surprise. Budget for annual and semi-annual expenses by dividing the total expense by 12 or six. If you put the money away during the year, those hefty expenses won’t blow your budget.

12. You Don’t Have an Emergency Fund

An emergency fund keeps you from having to spend out of pocket for unexpected expenses. If you don’t have an emergency fund right now, start putting a few hundred dollars away every month until you build solid savings. A standard target is to aim to set aside three to six months’ worth of living expenses.

What can Affect a Budget?

Companies undertake the budgeting process to commit to a financial action plan. Budgets help companies organize their finances, identify feasible ventures in which to invest and avoid committing funds to lackluster ventures. They are often designed to increase revenues, too. Before budgeting decisions are made, several issues must be considered, such as available funds and the company’s objectives.

Size of Available Funds

Before a budget can be created, business leaders must be aware of their companies’ current financial situation. For example, leaders should know the size of reliable revenue streams, as well as those that may be more variable. Only the reliable revenue should be considered in the budgeting process. Leaders must then determine net revenues by deducting expenses, such as wages and materials, from the reliable revenue.

Long-term Business Goals

Leaders must align their budgets with corporate objectives, opportunities and strategies. In addition, when leaders make budgeting decisions, they must consider not only the direct effect of a capital or operating expenditure, but also its indirect effects.

For example, a capital project may have an impact on a company’s technical infrastructure and possibly a company’s personnel requirements, such as technical support. As a result, budgeting decisions might also include how much to spend for technical infrastructure in various locations or funds that should be dedicated to develop personnel who support the infrastructure.

National and International Events

Risk is a major determinant of the feasibility of business investments. Budget decisions that pertain to national and international investments, therefore, will be influenced by risk-management efforts a company may implement to respond to particular scenarios.

For example, a company may implement controls to operate in a country experiencing political instability, civil unrest, as well as climate change and other factors. Also important are the potential market opportunities that are associated with emerging economies and a company’s past experience in particular locales.

Legislative Factors of Budget Preparation

Legislation and government regulations can disrupt a company’s marketing, production or financial plans in a major way. As a result, leaders should make budgeting decisions after considering existing or pending laws and government controls that may affect existing or proposed companies’ operations.

For example, a company that relies on websites to market its products in certain countries must consider the European Union regulations pertaining to privacy.

Industry and Competitor Analysis

Industry analysis can provide the context for many budgeting decisions because, in addition to the global economy, industry trends may affect company operations. For example, an industry’s outlook is influenced by the ability to improve the technical skills and abilities of company personnel.

In turn, government regulations, supply and demand, and international transactions also affect industry trends. For example, new government guidelines on permissible emissions may necessitate new equipment or changes to a company’s operating procedures, affecting several budget items.

Project Return on Investment

Rarely does a failing project or program justify additional spending, Instead, funds should be committed to opportunities for which a positive return on investment is expected. For this reason, the prior period and historic results have a significant influence on current budgeting decisions.

Read Also: How to Control your Spending

To evaluate the probability a project will lead to a positive revenue stream, specific project objectives must be stated and the positive and negative aspects of the opportunities must be identified and evaluated. Only then should budget dollars be committed to the project.

Bottom Line

Create a Miscellaneous category

We all have unexpected expenses pop up that we either didn’t expect or forgot to plan for. That’s where the Miscellaneous category comes in handy. Allocate funds to a Miscellaneous category so you have a safety net in case an expense comes up that you weren’t anticipating.

Give yourself some grace

It won’t be picture-perfect the first time. You may forget some things or not budget enough for groceries. But don’t stress—and don’t give up! It takes about three months to get into a budgeting rhythm. Keep your eyes on the prize and learn from your mistakes as you go.

It might seem tricky at first but stick to it. Just because your income is fluctuating doesn’t mean your budget needs to be unpredictable too!