One of the biggest challenges that many of us increasingly face is that of having a variable income. It is possible to budget your money on a variable income, but you do need to be better prepared for a rainy day. It’s easy to feel good about the way things are going when you have a good month with high income, but you can’t go crazy and spend to your income. What you need is a plan that allows you to set aside money so that on months when you come up short, you don’t have to turn to credit cards.

Figuring Out Your Monthly Average Income

Your first step is to figure out what your monthly average income is. Take a look at your tax return from last year. I like to look at my adjusted gross income for this exercise, since it is lower than your gross income, so will give you a more conservative idea of what is happening. (If you want to go really conservative, base your budget on your taxable income.)

Once you know your annual income, divide that number by 12. It’s an easy way to get a rough estimate of your monthly income. Do your best to cut expenses so that you are living within that monthly income amount. On months when you make more than your average monthly income, set the money aside in a high yield savings account. Then, on months when you don’t make as much as your average, you can access that money to help cover the shortfall.

Taking Care of the Important Things First

Living on a variable income means that you have to prioritize your finances. You need to know what is most important, and make sure that those things are taken care of first. Your housing payment, grocery purchases, insurance premiums and other high priority items should be paid for before low priority items like entertainment, junk food/eating out, and other “fun” activities. And, remember that your rainy day fund isn’t meant to help you buy a new TV or a new set of golf clubs; it’s there to help you during legitimately dry periods.

Bottom Line

Planning your variable income is a great way to make sure that you always have enough to cover the important expenses. Eventually, you will likely be able to build your income to a point where it is more reliable. Until then, though, it is vital that you plan ahead and do what you can to shore up your finances.