How to Budget and Save on a Fluctuating Income

Key Takeaways:

• People who don’t receive regular paychecks can still budget, with some modifications.
• Trends in business cycles can help set a base for budgeting.
• Establishing savings as a “bill” can help those with variable incomes accumulate a cash cushion 
  

Budgeting and saving are key components in financial success and moving your finances forward. But if you’re one of the nearly 10 million Americans who are self-employed, work as freelancers or consultants, work on commission, or have joined the gig economy, you may think budgeting is too difficult or even impossible to do effectively.

Think again.

Individuals with fluctuating incomes may need to handle budgeting a little differently and adopt a longer-term view of finances than those who receive weekly or monthly paychecks. But it’s doable. While standard techniques for budgeting still apply, these tips can help you make needed adjustments for that variable income.

• Pay attention to trends. Generally, people can often observe trends in income within a few months. As time goes on, those trends will become clearer. Eventually, annual patterns may emerge. Maybe you’re busier during the holidays and slower during the summer, for instance. Take note of these variations to determine your average monthly minimum income – or at least a range. You can use that as a base to budget, spend and save.
• Set a goal and save for it. Determine a realistic amount for what you need to save to provide a necessary “cushion” for predictable and unpredictable expenses. For example, many self-employed people must pay quarterly estimated income taxes. Others may pay annually but must save throughout the year to make the payment. Additionally, set a target to save an amount equal to at least six to nine months’ living expenses in an emergency fund. 
• Pay attention to trends. Generally, people can often observe trends in income within a few months. As time goes on, those trends will become clearer. Eventually, annual patterns may emerge. Maybe you’re busier during the holidays and slower during the summer, for instance. Take note of these variations to determine your average monthly minimum income – or at least a range. You can use that as a base to budget, spend and save.
• Set a goal and save for it. Determine a realistic amount for what you need to save to provide a necessary “cushion” for predictable and unpredictable expenses. For example, many self-employed people must pay quarterly estimated income taxes. Others may pay annually but must save throughout the year to make the payment. Additionally, set a target to save an amount equal to at least six to nine months’ living expenses in an emergency fund. 
• Establish a “floating fund.” Everyone should heed recommendations to accumulate plenty in savings, including emergency fund savings. But these are even more important for those with variable incomes. Many experts recommend having an amount equal to six to nine months of base living expenses on hand at all times. For those with fluctuating incomes, a full year’s worth is better. 
  Whereas emergency fund savings generally are only touched for a true emergency, people with variable incomes might consider these savings in a different way: as a “floating” fund to pull from when needed. For instance, during a lean income-generating period, you can “borrow” from the fund if needed to pay regular expenses, then replenish when income increases. The key is maintaining the discipline to think of, and use, the money in this way, and not as a “slush fund.” 

• Commit to a percent. The most reliable way to accumulate those savings is to commit to a percentage. Whenever you receive income, set aside a pre-determined percentage of it in a savings account. By doing so as soon as you receive the payment – no decisions, no questions asked – you will be mimicking the automatic savings deposits that help many workers who receive traditional paychecks.

• Bill yourself for savings. You can schedule an automatic transfer from a checking to a savings account at most financial institutions. Then record this expense just as would a regular bill every month in your budget. Start small if you need to and increase the amount whenever possible. For example, if you are working to pay off a credit card balance with a $100 monthly payment, increase your monthly savings “bill” by that $100 once you’ve paid it off.

• Make it a habit to save windfalls. When you earn or receive “extra” money (perhaps from a larger client check, a gift or even a yard sale), save it. 

• Keep savings separate. Don’t just keep savings in your day-to-day spending account with a mental note that they’re “saved.” Instead, put them in an investment or savings vehicle. Short-term CD rates have been on the rise, providing some interest earnings without tying up the money for an uncomfortably long time. Or put the savings in a money market account that allows withdrawals only at certain minimum levels. 

• Avoid debt. People whose income varies may need to think a little differently about taking on debt. Remember that what seems like a reasonable debt load can quickly become unmanageable if your income drops below expected levels. Consider your income fluctuations when taking on any loan commitments, and never run up credit card balances that you cannot pay in full at the end of the month.
  

The principles of budgeting and savings remain the same whether you are a full-time employee of a major company or an independent consultant just starting out on your own. But those whose income fluctuates month to month (or week to week) must be especially proactive and disciplined in planning ahead, creating strong savings and avoiding taking on added debt. Finances will become clearer and easier to manage, and the stress of fluctuating paychecks will decrease.