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How To Budget With a Fluctuating Income

Updated: Feb 16, 2023

Several of my clients have unpredictable income streams. They own a business where they can draw a regular monthly salary or base income. And, they receive periodic large sums of cash generated from company ownership, real estate deals, or other partnership investments. It is often challenging to save for long term goals with the pressures of running a business and having inconsistent cash flow.

If you'd like a more predictable budget plan but have ebb and flow to your income stream, learn how to strategically budget is essential. Doing so will make life less stressful.
Life is Terrifying. Budgeting with a Fluctuating Income Doesn’t Have to Be.

Previously, we’ve discussed the importance of identifying priorities to keep your goals in sight as well as how to establish a budgeting framework that meets your needs. With a small adjustment to our E-D-F budget framework, you can effectively budget with a fluctuating income.

Meet Your Essentials First

When I have discussions about how to plan for financial decisions without a clear total income picture, one strategy I recommend is to align your essential and fun/discretionary spending with your consistent income. Then, you can set aside large cash inflows to meet Future goals such as retirement savings, saving for an investment property or 2nd home, or funding college accounts.

If you know you'll be receiving a large cash flow once or twice a year, you need to adjust your budgeting strategy. Begin by allocate your consistent income toward Essentials and Fun/Discretionary items and the inconsistent income toward Future goals.
To create a budget with uncertain income, one strategy is to allocate your consistent income toward Essentials and Fun/Discretionary items and the inconsistent income toward Future goals.

This strategy works when the large cash inflows are sufficient across several years to adequately meet future goals. Typically, conversations with clients start with identifying their priorities and how much money they need to save for each identified future goal. Then we contribute once a year, or whenever large payouts are received, to the investment accounts dedicated for each goal.

An Example

One person I know is saving $3,000,000 for retirement, $240k toward college and $150k for a vacation home. We dedicate a portion of her bonus each year to an investment account for each goal. Her $100k bonus at year end is $65k after taxes. She puts $30k into retirement, $20k towards her kid’s college education, and $15k toward the down payment on her dream vacation home.

An example of Funding Future Goals with Year-end Bonus: Bonus Allocation: 35% towards taxes, 30% towards retirement (30 years to fund), 20% towards kid’s college education (10 years to fund), 15% towards 2nd home down payment (10 years to fund).
When using large cash inflows –– like your year end bonus –– to fund future goals, consider what your priorities are, how much each will be funded, and for how long (ie. time horizon).

Periodic evaluation

If you have fluctuating income, ask your financial planner to help you invest and save for future goals using this strategy. After several years you can evaluate progress toward each future goal. If you are not making sufficient progress, you may have to reevaluate your Future goals or you may need to adjust the allocation of base income from merely meeting Essential and Fun/Discretionary spending to include funding a portion of your Future goals.

If you’ve a fluctuating income, then you may benefit from having your Consistent Income directed towards Essential and Discretionary items and your inconsistent yet large cash-inflows directed towards Future goals. After a couple of years evaluate if you are meeting your Future goals. If not, then funnel a portion of your consistent income to Future as well.
If you are not making sufficient progress towards each of your future goals, make adjustments to your budget and allocate a percentage of your consistent income towards closing the gap.

Final Thought

It can be challenging to budget with a fluctuating income, especially when you’re first starting. However, once in place, a budget that takes into account your financial ebb and flow will free you from worrying if your goals are being met.

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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.

Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.


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