How Do I Do a Budget If My Income Changes Each Month?

Mike asks how to create a zero-based budget when his pay varies from month to month. Dave explains.

QUESTION: Mike in Oklahoma asks how to create a zero-based budget when his pay varies from month to month.

ANSWER: What a zero budget is, for those of you that don’t know what Mike’s asking, is where you give every dollar a name on purpose, on paper. Every dollar has a mission. You put your income at the top of the page, and then you spend your money—assign your money—give your dollars a mission all the way down the page until every dollar has a name. Every dollar has a mission. Your income minus your outgo on paper equals exactly zero. That’s a zero base.

The portion of your income that is predictable, which would be a low average, if you’ve never gone below $3,000 a month but you usually make $5,000 or $6,000, then you can budget a zero-based budget on $3,000 pretty easily. Whatever your low average is, you run your normal zero-based. Then, for the portion that it varies above that that can’t be counted on but does come and go even though it’s not guaranteed but it does come and go, you ask yourself a question.

The items that did not make the cut—the things you want to do or would like to do or need to do that did not make the cut in the original zero-based budget—you look at those remaining items, and you say, “If we make enough money above the $3,000—above the amount we zero-based budgeted—if we make enough money to do one thing above that, what would we do?” And you look down and find that item, agree on that with your spouse, and put a “1” beside it. Then you say, “If we can do one more thing after that because we made a little bit more money, what next thing would we do?” You put a “2” beside that, and then a “3,” “4,” and “5.” Then you rewrite the list in order of priority—most important thing to least important thing—and then when you break that through the amount of the low average, zero-based amount in our example—that’s $3,000—when you make more than $3,000, you go right down your prioritized spending list. You give every dollar a name right down that list. That’s the best way to do it. Then every so often you rewrite the list and scramble it and do it again—like every couple of weeks.

Sharon and I lived on that with a yellow pad for years because we were in the real estate business when we first started doing a budget, and some months we literally made zero. Some months, we might make $20,000. We were constantly running back and forth, back and forth, and we had to budget that month’s bills by priority with the checks that really came in. We call that the irregular income planning sheet, and it is in the budget forms in Financial Peace University and in the back of the book The Total Money Makeover—any of the books that have our budgeting forms in the back of them. The irregular income planning sheet—and all it is is a prioritized spending plan for variable income people—people that are straight commission, people that own their own business, and those kinds of things.

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