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Variable Income

You may be in a situation where your income fluctuates considerably.  Perhaps there’s a big check one month, but then no income for a few months after that.  You need to stretch that check until more income arrives.  Some people receive money in lump sums like:

  • Fixed annual or semi-annual payouts
  • Large insurance settlements
  • Fixed retirement payouts that arrive less frequently than monthly

Fortunately, YNAB can help with this.  We’ll outline three approaches in this article.  You can use all of them if you want!

Learn to live on last month’s income

This is our first recommendation.  Follow Rule Four and get a month ahead on your budget.  When all the money you need for the month is in the bank on the 1st of the month, you’ve created a buffer between you and the financial edge. 

Since any money earned is set aside for the following month, you’ll see a lower income month coming before it arrives. That will give you time to adjust and rethink things in your current budget.  You’ll find your finances will be much more stable with this approach.

Now let’s look at two different situations to explain two other approaches.

Budget for the future with your “now” dollars

Situation:  You receive a $9,000 paycheck but you probably won’t receive another one for a few months.

By default, any money that’s not assigned to the current month rolls into next month. When you have a big month, budget as far out into the future as your money will allow.   For example, let’s say you get a check for $9,000 in March and you know it needs to last you three months. 

$9,000 divided by 3 months = $3,000 for each month

Here’s the $9,000 at the top of March: (No dollars have been assigned to a job yet.)

Notice that the $9,000 was earned in March.  You can see it under Income in the header.  It also appears at the top of April and May.  Since those dollars have not been assigned a job, they roll forward in time.  Now let’s budget $3,000 into March:

Notice that of the $9,000 it shows that $3,000 was budgeted to different categories in March.  The remaining $6,000 has now rolled over into April.  Now you just need to copy the March budget into April.

Now March and April have been budgeted and the last $3,000 has rolled into May.  Use the Quick Budget feature one more time to budget for May:

You can still tweak this as the months unfold, adjusting your categories as you need to, but now you know how much you can spend in each month.

Create a “deferred income” category

Situation:  You’re paid regularly, but the amount varies. somewhere between $2,000 and $3,500.

Perhaps you’d rather wait and budget for your future months when they’re here.  But you want to make sure you don’t spend money since you know you’ll need later. 

Create a category in your budget called “Deferred Income”.

Your goal is to save up money each month that can be used when a lean month comes along. In the example above, the monthly income for March is $3,500.  $500 was budgeted into the Deferred Income category.  Let’s say $500 was budgeted every month for three months.  The category would now have $1500.  Then in June, you have a tight month and only earn $2000:

Release the money from the deferred income category by entering the amount you need as a negative number in the budget column.  This make the money available to budget.

Since there was already $2,000 available to budget, releasing the $1,500 brings the total to $3,500.

You can use any one of these approaches or combine all three.  It will strengthen your position financially, and cushion you from the ups and downs of variable income.

What if I’m starting out in a low income month?

The best thing you can do is follow the three step process.  Enter the money you have right now and budget that as far as you can--prioritizing as you go.  That’s an effective way to work.  By focusing on what you have right now, you also focus on what’s important right now.

If I have a large amount of money that I don't need for a while, where should I physically keep that money?

You can keep that money in any account you wish.  The budget is only concerned with your plan for your money, not the location.  If you decide to move the money into a different account, you'll need to transfer it back and forth.