how to beat the fear of budgeting on a fluctuating income

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Sounds impossible, doesn’t it?

You know you should make one of your goals this year to improve your finances. But how can you do that when you’re never sure how much money will be coming in?

The experts simply say to prepare a budget. If you don’t, you’ll overspend, you won’t have enough to retire, your credit score will suck, and you’ll never have the things you desire. So just budget, they say, and your financial problems will be solved.

But hey, your income changes every month. You’re not like all those people who get a fixed salary or a set rate per hour for forty hours a week. You’re a freelancer. One month you kill it, and the next you’re scrambling to get something in the bank account.

Sound familiar?

How can anyone with an income that fluctuates do a budget, especially someone like you who has no time at all?

There is a solution that works for others, it doesn’t take long to implement, and I will show it to you.

Let’s get started.

For the FREE companion spreadsheet that goes along with this post, click the link at the end of the post.

STEP ONE – Determine How Much You Need

To begin with, you need to determine the bare minimum you need each month to pay your bills. Not all expenses, just those you truly have to pay—the mortgage, car payments, utilities, credit cards, and so on.

Ignore, for now, all of the expenses that are optional like going to restaurants, taking vacations, or buying your nephew a graduation gift.

You can do this review by looking at a month or two of expenses, but it is better to look at a whole year.


Looking at a whole year will catch expenses that only happen once a quarter, a couple times per year, or just once a year. If you pick the wrong month to look at, you could miss those expenses.

Again, only look at the expenses you absolutely must pay.

Once you’ve done that, add them up and divide by the number of months you looked at and that’s the number we’ll use. That’s your baseline.

STEP TWO – Transfer the Baseline Amount to Your Checking Account

Transfer enough money into your checking account until you have your baseline. If you have too much in there already, transfer the difference out of checking into your savings account, but if you have too little then transfer enough savings into checking. When all is done, your checking account should have your baseline amount in it on the first of the month.

Don’t have enough in your savings to build up your checking account? Go back and review your expenses. You either have to cut expenses or figure out how to increase your income.

NOTE: If this is just a temporary issue, then we will discuss later how you can set up an emergency fund to help cover expenses during the months when your income is low.

STEP THREE – Forecast Your Income

Now that you know how much you need on average each month, do you regularly make enough to cover that?

Look at your earnings for the last twelve months and average them.

Does your average monthly income exceed your baseline for expenses? If so, you’re in great shape. If not, you need to either reduce your expenses or increase your income, or you are going to get in a hole over the long term.

After you do the above, forecast your earnings for the next several months. Do you foresee any months where you won’t meet your baseline? If you do, then make sure you have enough in your savings to cover it. If during your review you noted that your income was below your baseline from November through February, for instance, then you should keep at least four times your monthly baseline amount in your emergency fund to cover those months in case it happens again. In addition, you won’t be able to spend any money over this baseline amount, to ensure that you’ve got all your basic expenses covered.

STEP FOUR – Earmark Earnings Over Your Baseline

If you earn more than your baseline, where will you put the difference?

It could go into any of the following (in no particular order except for the first item, which is the most important):

1. Increase your emergency fund (you want 3-24 times your baseline amount, or at least enough to cover you when your income is low)

2. Fund saving for large purchases (new house, car, vacation, wedding, computer, etc.)

3. Treat yourself (put an extra $300 into your restaurant expenses, add some funds to your baseline amount in your checking account next month, go out for coffee twice a week instead of once)

4. Start a play fund or education fund and use these amounts to invest in yourself or reward yourself for you hard work

5. Give to charity

6. Fund retirement accounts

7. Pay down debt

Make sure the first place your extra income goes is to fully fund your emergency fund. With a fluctuating income, you want to make sure you have savings for the months where you don’t make your baseline.

Other Tips to Help You Stay on Track

1. Keep separate bank accounts for personal, business, checking, savings, and your emergency fund (some banks, like Capital One, make this very easy to do by giving you one savings account that you can divide into sub-accounts and label them “emergency fund,” “vacation fund,” and so on).

2. Hire a bookkeeper and a tax accountant. It pays to pick people who are specialists. Generally these are two different people because your CPA probably won’t want to do your bookkeeping.
It’s also less expensive to have a bookkeeper maintain your records rather than a CPA.

3. Set aside money for your quarterly business taxes right away. Don’t wait until they are due. This way you won’t be scrambling or borrowing to pay your taxes.

4. Try to avoid impulse spending. When you find something you want to buy, delay the purchase a week and see if you still want it.

5. Prioritize your spending. If you’re income is high enough in the prior month that you can afford some discretionary expenses, put the money toward what you value most.

6. Live off your spouse’s income. If you’re fortunate enough to be able to do this, you can dump all of your earnings into savings.


Hopefully you are excited and can see the value in taking these steps. Most of the work is up front, and once you review your finances and get your accounts set up properly you won’t have to do much going forward. Just make sure your checking account has enough to cover your baseline expenses and whatever else you budget for discretionary expenses, then transfer the rest to savings, starting with your emergency fund until it is at the desired level. The key to your success will be only spending out of your checking account.

If you would like to download an Excel spreadsheet to help you crunch the numbers, click the link HERE and you can download it.

Don’t wait. There isn’t a better time to start than right now.