The Sandwich Method: 3 Steps to Budget with a Variable Income

When I left full-time employment in July of 2020 to launch Copper Seed, my steady income became variable.  And, since I worked from home instead of an office, my expense structure changed. Creating a budget with a variable income and changing expenses was a unique challenge.  About 40% of American families live on variable incomes. Young adults, just beginning to make independent financial decisions and working hourly jobs, are most likely have variable incomes and have the least experience maintaining a budget.  How do you balance today’s needs with tomorrow’s goals when your income changes from month to month? I developed the “sandwich method” to budget my variable income. Read on to learn how it works.  

First, determine a reliable baseline income

Although my income varied, after a few months of self-employment, I had a reasonable sense of the highs and lows. I took the monthly average and used a little lower than average as my baseline amount for budgeting purposes. For example, with a range of $2,500 to $4,000 monthly, I built a budget around $3,000 of monthly income.  

Next, use the Sandwich Method to plan outflows 

Your income helps you accomplish 3 things:

1. Pay for current needs like rent, utilities, food, gas, entertainment, insurance, etc. Some of these  are monthly expenses, but some are annual and take special planning.
2. Pay for  past purchases through payments on loans such as credit cards, auto loans, student loans, etc. You typically pay these on a monthly basis as well.
3. Save for future needs through tools such as a cash emergency fund, retirement accounts, and educational savings accounts.

Use the sandwich method to allocate your income over these priorities by:

1. Saving for annual expenses,
2. Allocating for monthly expenses (including loan payments)
3. Building long-term savings

Save for Annual Expenses

Do you have certain expenses, like vacation costs, holiday gift expenses, or auto taxes and registration fees, that come due annually, and it’s hard to find the money for these payments? We often end up paying for these with a credit card and then end up paying more in interest to pay them off. But, with a little planning, we’ll be better prepared to pay these predictable expenses with cash on hand. Saving for annual expenses is the first step, and the bottom slice of our sandwich:  List all of your annual expenses and their approximate cost, and then add them up.

Savings for Annual Expenses
Auto Insurance	$600
Renter’s Insurance	$200
Auto taxes and registration	$150
Vacations	$600
Holiday Gifts	$500
Total	$2,050

  Divide the total by 12 and set that much aside monthly for these expenses. In this case,  $2,050/12 =$171 per month.  You’ll set aside $171  monthly for your annual expenses. Consider putting these funds in a special savings account to keep them separate from other savings.

Allocate for Monthly Expenses

Some expenses occur monthly. These include fixed expenses that are predictable from month to month like rent and utility bills. Payments towards debt, like car loans, are also typically predictable. Monthly expenses also include expenses that vary–like entertainment and food costs. If you own a business and pay business expenses or invest in growth through your income, account for that as well. Monthly expenses are second step, or the filling in our sandwich.

List your regular monthly expenses. Assign a monthly spending amount to each category, and add these up.

Monthly Expenses
Rent	$1,000
Utilities	$200
Auto Gas	$200
Groceries	$250
Dining Out	$250
Clothing	$50
Subscriptions/Memberships	$50
Auto Loan	$250
Total	$2,250

  So far, the total monthly funds needed for monthly expenses and annual expenses is  $2,250 + 171 = $2,421. Assuming minimum monthly inflows of $3,000, your excess cash is  $3,000 – $2,421 =$579 monthly  You can put this into long-term savings. 

Build Long-Term Savings

The top slice of our sandwich is long-term savings. This covers items such as a cash emergency fund and savings for long-term goals like a child’s college education and your retirement.  

First, you need to build  a cash fund that covers at least 6 months, but preferably 12 months,  of expenses. If you have extra cash every month and can replenish this fund,  you can use the fund when opportunities arise as well.  In this example, 6 months of savings would be  $2,421 * 6 = $14,526.   Since we’re saving $579 monthly,  it will take 25 months to establish the emergency fund. In months when you earn more income, you can put the extra into the savings account to reach your goal sooner.  As your income grows over time, and you fully fund your emergency savings, determine how much to save for retirement and other long-term goals. This is a good place to plan for other large expenses like a new car.  In an effective budget, every dollar will be accounted for, which means that every dollar of income either goes towards savings or expenses: monthly savings + monthly expenses + long term savings = income. $171 + $2,250 + 579 = $3,000

Finally, Put Your Variable Income Budget into Practice

Once you’ve created a budget for your variable income, put it into practice. Here are a few rules of thumb to maintain your budget:

1. Save first: At the beginning of the month, move cash to your two savings accounts so you don’t accidentally spend it. When it’s time to pay annual expenses like auto insurance or holiday expenses, move that amount from annual savings to your checking account to cover those expenses. 
2. Track Actual Spending: For the first 2-3 months, track your actual spending against the guidelines you set for yourself. If your spending varies a lot  in any category, either adjust your spending or adjust the total you allow yourself. Perhaps it’s not realistic to only spend $250 monthly for groceries. You can increase that amount to $300, but you have to reduce something else. In the end, your budget needs to balance.
3. Target the problem areas: Sometimes you just need to focus on the most problematic areas. When I started working from home, my food and entertainment costs increased, so I had to watch these more closely. In general, discretionary categories, like eating out and entertainment tend to be the hardest to control. Large annual expenses like vacations and holiday expenses can get out of hand as well. Visit our Instagram page for tips on planning for these times of the year.

The Power of Income

Now that you’ve established a budget for your monthly savings and expenses, let’s talk about future growth. You can only decrease your expenses so much, so as you look ahead, focus on increasing your income by growing your career or business and creating multiple streams of reliable income. Multiple streams of income ensures that if one source dries out, you’ll still have income from others.