How to Budget with a Variable Income

We are a single income family where we allocate my full-time salary into the different budget categories. For our side hustles, we save everything that we earn (after taxes) into our financial freedom account (FFA) and use that money toward buying appreciating assets. Since we have not gone full self-employment mode, I am always curious how to budget when one self-employees and has a variable income. So today I asked my friend fellow personal finance blogger Jessica from Jessica Moorhouse to explain how her and her husband budget with a variable income.

Take it away Jess!

I’ve officially been self-employed for 1.5 years. That’s something I never thought I’d write. If I’m completely honest, when I left my corporate job at the beginning of January 2017, I gave myself a year. A year before I ran out of money and started desperately applying for jobs again.

But that’s fortunately not what happened. Not at all, actually. The first year of being self-employed, I was able to out earn the job I left by over $20,000. This year (fingers crossed), it’s looking like I’ll earn 6-figures.

Now, when I say “earn,” I’m not saying take-home pay. That’s something I think a lot of people aren’t transparent about or don’t like talking about when they share posts about making 6-figures per year with their business. In almost all cases, those people are referring to their gross income. That’s income before business expenses, income tax, CPP and EI. That’s what I’m referring to as well. But it’s still really exciting and empowering to know that I was responsible for generating that amount of income on my own. It was me who got those clients, did the work, and sent out those invoices. That’s frickin’ cool!

Still, I get asked all the time how I feel earning a variable income. Aren’t I afraid that one day everything will dry up and I’ll be forced to get a real job? Wouldn’t I feel more secure working a 9 to 5?

My answer to that is “Hell to the NO!”

The past 7 years before I left the corporate world, I worked a variety of jobs in a few different industries. During those 7 years, I never felt financially secure. I was always terrified that no matter how hard I worked or how much seniority I had, one day I’d be pulled into my boss’ office and would be told to pack up and leave.

This may not be a normal or even rational fear, but for me, it’s what I got accustomed to seeing. Every single job I’ve had, there have been mass layoffs. Yes, this could just be my awful luck, but to me it was the norm. A 9 to 5 job never signified long-term security. It meant never getting too comfortable and always updating the resume and cover letter.

Still, I never had plans to become self-employed. The biggest reason for that is because my husband has been self-employed for 11 years. So…I’ve seen it all. The feast. The famine. The tax season headaches. Not to mention the confusion when it came to budgeting.

I saw what self-employment could look like and it certainly didn’t make the grass any greener.

Yet, here I am. 1.5 years into being my own boss. And guess what? The grass is greener. For me anyways.

Right now, I’ve honestly never felt more confident or secure financially. This of course has a lot to do with being financially responsible up until this point, and having a hefty emergency fund. It also has a lot to do with understanding how to budget properly when dealing with a variable income.

Budget with a variable income

For years, when I was working my 9 to 5 and my husband was working for himself as a freelance audio engineer, he would use the excuse that it was impossible to budget with a variable income. For all those years, I believed him. Then, I became self-employed and saw everything through a different lens.

Budgeting isn’t impossible when you have a variable income. It’s more complex and more work, but not impossible.

The first thing you need to figure out is what net income you’re working with. In my first year being self-employed, I was a bit nervous to commit to a number. Eventually I chose to look at how much my business earned when it was a side hustle the previous year, then doubled it. I knew that if I worked hard and dedicated double the time on my business, I could double my income. But as a safety net, I saved up a year’s worth of living expenses in my emergency fund. That meant that if I didn’t earn a penny in my business (which would be near impossible), I could pay all my bills, afford groceries, and not go into debt.

Then, throughout the year as my actual income number became clearer, I would adjust my budget to reflect that.

See? That’s not that bad.

Now that I’m in year 2 of my business, I used year 1’s net income as my benchmark. That income was what I knew I could earn again, though I hoped I could earn way more. Similar to last year, as the months roll on and my actual net income becomes more defined, I adjust my budget to reflect that.


Balancing Your Income Between Business & Personal Obligations

Dividing that income once you get it is a bit more of a hassle though.

When I get paid by a client, I don’t just deposit that money into my chequing account and call it a day. Instead, it looks more like this.

Gross Income Sales Tax Business Expenses Income Tax, CPP & EI (25%) Net Income
$10,000 $1,300 $1,000 $1,925 $5,775

When I get paid, first I take off sales tax and put that money into a special savings account. Then I see what I spent that month on business expenses and move some money onto my business credit card. Then I take 25% off what’s remaining for income tax, CPP and EI and put that into a special savings account. Whatever is left over is my net income that I can use to pay for my personal expenses, put towards my savings goals and my long-term investments.

Again, once you’ve got a system that works for you (and this one works the best for me), it’s simple and will take you less than an hour to go over and implement each month.

Making Sure You’re Always Saving & Investing

I was really worried that my worst-case scenario would happen and I wouldn’t be able to earn enough to save for some of my savings goals (ie. travel) or invest for my retirement. Luckily, even though I was prepared for that scenario, it didn’t happen.

As mentioned earlier, once I know my monthly net income, I move a percentage of that money into savings accounts for specific savings goals. I also move a percentage into my TFSA and RRSP for my investments.

I’ve actually got it set up way simpler than that. I have one savings account I call my “Funnel Account” that has a healthy buffer in there, and then I set up regular deposits from that account to go into other savings accounts and my investment accounts. Basically, I tried to replicate how I used to do automatic savings deposits when I was a salaried employee, and it’s been working out just fine.

If there is a time during the year when I’m afraid I won’t have enough money to put into those savings buckets or my investment accounts, I just turn off those automatic deposits until things pick back up. There are always times in the year that are more lucrative than others (summer is always slow, but fall and winter are nuts!), so I make sure to just monitor how things are going, and make some adjustments accordingly.

Budgeting with Your Partner

I’ve mentioned my husband a few times, and you may be wondering how we budget together. Well, my husband and I don’t budget together. Not really. We’ve been together 11 years, married for 5, and we keep almost everything separate. We have a joint chequing account and credit card for our joint bills and expenses, and we have a joint savings account so we could both automatically save up to pay our insurance, property taxes and joint trips.

Everything outside of that is separate. I know a lot of people have some very strong opinions about combining finances when you’re married, and that’s fine by me. I have strong opinions about why that doesn’t work for my husband and I, and if what we’re doing has been working very well all these years, there’s no reason to change it.

Final Thoughts

It has been so fun to share how I budget and my thoughts on self-employment, especially since I don’t share too much about it on my own blog or my Mo’ Money Podcast anymore.

One thing I do want to leave you with is that although I shared how I do things, that doesn’t mean my way is the right way. I have tried so many different strategies and methods over the years, it’s taken up until now to find what works best for me and my husband. Personal finance is personal, so take what you like from my way of budgeting and disregard anything that you know will never work for you.

The end goal isn’t to find the right way to do things. It’s to find the right way for you to do things.

But if you ever have a question, I’m happy to chat over email anytime.

Thank you Jess for this great overview. I definitely learned something today.

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9 thoughts on “How to Budget with a Variable Income”

  1. How do you pay into EI when self employed? I’m aware of the maternity or illness EI for self employed people. But what I would really benefit from is the regular sort, for the month or two I have off between contracts.

  2. My wife and I are both on variable income now that I have left work after achieving Financial Independance. I don’t create any funnel accounts or separate accounts, I just leave it all in my chequing account and adhere to my budget tracking finances. I feel that having the personal finance skills to achieve FI that an individual will have the understanding knowing that there are earmarks to that income when it is earned. I guess one could create a side account for all business income to flow in and expenses out of, then only draw personal income as needed. That then matters how much transactions are taking place as if it is few and far between like mine then in my regular account is ok. If it was a lot of income and transactions I would have the separate account. Regardless, I think the biggest takeaway is awareness of obligations on that freelance self employed income and that $10K earned isn’t really 10k. Great post

    • Definitely something to think about once we achieve FIRE status. Will have to take a closer look at how to transfer money from the different accounts still.

  3. we keep plenty of money separate in our house and always have. we had to adjust some things when we lost one income but having one’s own money is important for 2 independent people. we use that big buffer and spill over idea to fund our retirement accounts too. if some huge unexpected expense comes up or an incomes comes up short we adjust in much the same way where the lifestyle hit isn’t painful for us. we’re not in this life just to survive it.

  4. I had pretty variable income for a number of years, and my secret was just to spend as little as possible until the earnings were locked in.

    In other words, I lived like a poor college student until I cashed the checks. This strategy worked pretty well overall.


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