Money Talks, So Should You

Q&A: How can I set a budget when my paycheck fluctuates?

Mitch Marsden
by Mitch Marsden , NAPFA

The ideal answer is to build up enough cash that you don’t depend on a variable weekly paycheck to cover the monthly or annual budget. As one of your first goals, seek to establish enough cash (outside of a separate emergency fund) to cover one to two months of your normal living expenses. That should give you plenty of buffer so that you can continue with a smooth weekly/monthly spending pattern even though your income may be variable.

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With this type of cash reserve in place, you’ll have more freedom to create your budget. It will be easier to take a step back and consider your average income and spending over a longer period of time, such as a year. You can then break those averages into shorter weekly or monthly periods.

From there you’ll just need to track actual income and spending and make sure you are indeed keeping average spending below average income throughout the year. If the actual numbers get too out of whack, you’ll have to consider adjusting the budget or changing your spending patterns.

If you do not have the cash reserve in place and are truly living week to week, or paycheck to paycheck, you will need to be much more careful and precise with your budgeting. Here are some words of advice: 

1. Start by listing out your monthly expenses and categorizing them first as fixed costs (e.g., mortgage, rent  costs that don’t change month to month) and variable costs (e.g., food, entertainment, utilities  costs that vary month to month based on usage or your real time decisions).

2. Once you have these categorized, estimate how much you expect to need for each expense item at the time it will be needed.

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3. Add another categorization by starring or highlighting the expenses that are truly necessary (food, shelter, etc.); leave those expenses that are discretionary unmarked.

4. Next, focus just on the necessities and literally break out on a time line on paper or on a calendar when each expense will be due. For example, if you shop weekly for food on Saturdays, list the approximate food cost on each Saturday.

5. Take a moment to evaluate how your approximate average income each week compares to the necessities that week.  You may find that for the first two or three weeks of each month, your income needs to be used or saved for the necessities of the month. Perhaps in the last one or two weeks of each month you will find some excess.

6.  Add the discretionary expenses (movies, books, eating out, etc.) toward the end of the month when most or all needed expenses will have been taken care of.

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7.  Track your progress each week to see how income and needed expenses shape up to actually occur. On weeks of excess income, save it until you have funded the rest of the months’ necessities before using it on discretionary expenses or flat out blowing it. Really try to use those excess income weeks to build up a cash reserve so that you don’t have to do this for the rest of your life.

Some people use credit cards to help keep spending patterns smooth when there is variable income like this. This can be a good strategy, but it should be used very carefully and only if the credit cards are paid off monthly.  Too often just owning a credit card leads to excess spending on unnecessary stuff  not only can that hurt your budget and create bad spending habits long-term, but high interest debt can and often does creep up on you very, very quickly. Don’t underestimate its sneakiness.

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Mitch Marsden is a member of the National Association of Personal Financial Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.