While budgeting is recommended for all who wish to stay on top of their money and avoid overspending, it is especially important for those who do not know what number will appear on their next paycheck. Whether you have been balancing a fluctuating income for years or are experiencing a financial impact from COVID-19, there are five steps you can take to ensure that your spending habits are stable, even if your income is not.

  1. Estimate your lowest monthly income - when constructing a budget for the first time, it is easier to start low than to start with an idealized number, because you can always go up. To determine your lowest possible income, review previous pay stubs and find the lowest net amount paid. If this is your first time experiencing a fluctuating income, estimate what you think your lowest month might look like.
  2. Calculate your fixed, organic and discretionary expenses - now that you have identified your lowest possible monthly income, it is time to write out your monthly expenses. Start by listing your fixed expenses (rent/mortgage, insurance, savings goals, debt payments). Then move to organic expenses (food, utilities, transportation). Finally, end with calculating your monthly discretionary expenses (entertainment, dining out, streaming services, etc.). To better estimate your expenses, reference your last few months of bank statements and credit card bills. Remember to satisfy your needs, not your wants.
  3. Take your budget for a test drive - to see if your newly created budget is livable, test it out the following month. The keys to success with budgeting on a fluctuating income are to be flexible, to stay on top of your spending, and adjust your budget in accordance with how much money you bring in.
  4. Create a Hill and Valley fund - with a fluctuating income, there will be months where you bring in more (hill) or less than average (valley), so to avoid pulling from your savings account or emergency fund, create a Hill and Valley fund. A Hill and Valley fund acts as a buffer to help you pay your expenses when your monthly income is lower than expected. To create a Hill and Valley fund, allocate extra money from particularly lucrative months directly into the fund.
  5. Be patient and give yourself grace - experts claim that, on average, it takes an individual three months to become comfortable with budgeting, regardless of the stability of their income. So with that being said, be patient and do not get discouraged if balancing your expenses into a budget takes longer than expected or if one month, you find yourself spending more than you planned. Do not give up. Budgeting takes time to get right, so just keep going!

Learning to budget on a fluctuating income not only lets you know where you stand with your money, but it also provides you with the power and peace of mind of knowing that you are in control of your money – rather than your money being in control of you. If you have further questions regarding how to budget on a fluctuating income or concerns on how COVID-19 may affect your financial future, consult one of our financial experts at NDBT today. Visit www.ndbt.com for more info. Member FDIC.