Q. How do I prepare a monthly budget when my variable income?
Learning to prepare a monthly budget can be a challenge even if you have steady income. Having wildly variable income can add to the challenge. But there are a couple of options to handle it:
Option # 1: Base your monthly spending plan (budget) on your minimum monthly income, then list any expenses not covered by your base pay on a separate form (listed in order of priority). As income above the base pay amount is received, begin paying the items on the separate form, beginning with the highest priority item first. Be sure to list the “want” spending on the supplemental list (ex. eating out, vacation savings, etc.). Make sure the needs (ex. rent/mortgage, groceries, gas for the car, utilities, etc.) are paid first, just in case the additional income doesn’t materialize one month.
Option # 2: Smooth your income by “banking” excess pay from a high-income month to be drawn down during a low-income month. For example, suppose your expenses are $5,000 per month. During Month A, you earn $8,000. Segregate $3,000 ($8,000 less $5,000) into a separate account. During Month B, assume you only earn $3,500. Transfer $1,500 from the $3,000 “banked” last month back to your checking account to provide the $5,000 needed to cover Month B’s expenses.
I like Option # 1 when your income has a predictable minimum in a month. For example, your job has a base pay of $X,XXX per month, but your commission income can vary from $0 to $Y,YYY each month.
Option # 2 works well when you have dramatically variable income each month. An example would be a seasonal job that is commission only. Your income could be zero one month and then $XX,XXX the following.
Q. My spouse and I maintain our own checking accounts and our bills are divided up each month. Should we each prepare our own budget?
In my opinion, married couples should prepare their monthly budget together, based on their combined income. One of the great benefits of preparing your budget together is the strengthening of your marriage relationship through increased communication. Like it or not, money is a huge issue in most martial relationships (and certainly the number one cause of divorce), so anything you can do to work as a team – instead of “his” money and “her” money – will benefit your relationship.
Once the single monthly budget is prepared and agreed to by each spouse, the actual payment of the expenses can be divided between the spouses (most likely based on their relative income). Personally, we use a single checking account for our monthly expenses, but I understand many couples prefer to each have their own accounts. Just make sure it stays “our” money regardless of whose account it is sitting in!
John is a CPA and personal finance coach. Email your questions to firstname.lastname@example.org.
If you need confidential financial coaching for your particular situation, please contact John for a no-cost, no-obligation discussion of your needs.