Q: I have a full-time sales job that pays me based solely on commissions earned. My income can vary anywhere from $1,500 to $3,500 per month. My expenses  are fairly steady but I never know how much money I’ll earn each week. How can I make a practical personal budget when my monthly income varies so much?

A: You are smart to be thinking about these issues!  Budgeting is important, and having a variable income makes the task of budgeting somewhat more complicated.  It does provide you with some opportunities as well, however.

First, if you know that your income will be at least $1,500 per month, your monthly fixed costs should come out of that.  These costs include things like rent and utilities.  If your employer has a 401k program, be sure to participate in that also.  You should save an amount at least equal to your employer’s match.  In other words, if your employer will match up to 5% of your salary, you should save 5% and your employer will match that with an additional 5%.  The employer match is like “free money.”

You also indicate that your monthly income can be as high as $3,500 per month.  Thus you have the potential to have as much as a $2,000 “surplus” in some months.  This “surplus” should go to 2 places as follows:

1)    Use 1/2 to set up a “contingency” fund to cover additional variable expenses and fixed expenses that do not occur each month.  Variable expenses would include things like food, entertainment, vacations, and clothing.  Fixed expenses that do not occur monthly would include things like payments for insurance, car repairs, or health related expenses.  Within the contingency fund, budget to make sure that the fixed expenses get paid first.  You can always adjust your variable expenses up or down.
2)    Use the other half of your “surplus” to save for intermediate or long term goals.  These could include things like buying a car, paying for a graduate degree, buying a house, saving for a child’s education, or saving for retirement.

The fact that you have a variable income does pose some additional challenges, but if you follow the strategy outlined above, you will also have the opportunity to save a substantial portion of your “surplus” earnings for longer term goals.  You will thank yourself for that!

Answer provided by Dr. Susan Coleman, Professor of Finance at the University of Hartford and Educational Advisor to The Hartford’s Playbook for Life program. To download or request a Playbook for Life and get more tips on everything from taxes to insurance to evaluating job offers, visit www.playbook.thehartford.com.