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How to Budget on a Fluctuating Income

By Austin Kilham · August 08, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How to Budget on a Fluctuating Income

When you’re a self-employed, hourly, seasonal, or gig worker, your free-form schedule can give you a lot of freedom to choose where and when you work. However, it also often means your income is irregular, depending on how much work you do each month.

An inconsistent income makes it all the more important that you budget well to make sure that you can cover necessary expenses while still working toward your financial goals. To help you learn how to do just that, read on for advice on:

•   What an irregular income is?

•   Examples of fluctuating incomes.

•   Tips for budgeting with an irregular income.

What Is an Irregular Income?

Irregular income is money that you earn that does not follow a regular schedule. Some people are salary workers and know, down to the last penny, how much they will receive every week or every other week.

But others earn a fluctuating amount of money that can come from a variety of sources, including:

•   Freelance work

•   Contract work

•   Hourly work

•   Seasonal work

•   Commissions

•   Bonuses

•   Stock options, and other types or workplace compensation

Irregular income can fluctuate and at times be unpredictable, making budgeting more challenging. Perhaps you are a home stager who has a super busy season in the spring, full of projects, but things are fairly quiet at other times of year. Or maybe you are a registered nurse who some months takes on more shifts than others. These are examples of why your income can be up and down.

How to Budget With an Irregular Income

In many ways, how to make a budget when income varies is the same process you’d use if you had a regular paycheck. Start by figuring out your average income. Add up how much you made in the past 6 to 12 months and divide by the number of months. This should give you an idea of your typical monthly gross income.

If you work for yourself, taxes won’t be withheld from your paycheck. Be sure to account for these as you develop a budget. The amount you owe will depend on how much you make, but as a rule of thumb, you can subtract 25% to 30% — which should cover whatever taxes you likely owe — to arrive at your net income. Alternatively, you can make taxes a line item in your budget. You might pay these taxes quarterly or once a year, depending on your particular situation.

Next, determine what are considered your living expenses; the basics, such as rent, utilities, car payments, and groceries. Subtract this amount from your average net income. The money you have left represents your discretionary income, which you can spend on things like restaurants, travel, gifts, and entertainment. However, don’t overlook that this discretionary money can and should also be funneled into paying off debt and saving for the future, whether that means an emergency fund or a new car.

Your budget can then guide your spending. If, say, your housing or food costs go up, something else will have to come down. Or if you get hit with an unexpectedly high dental bill, you’ll need to figure out how to accommodate that as well.

Recommended: 7 Reasons Why Budgeting for Couples Is Important

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Tips for Budgeting With an Irregular Income

Once you’ve got an idea of how much you make each month and how much you spend, you can budget with a fluctuating income. Following these tips can help you stick to your budget and tweak as necessary as your income changes month to month.

Using the Zero-Based Budgeting Method

A zero-based budget works well for many people with irregular incomes because it assigns every dollar you earn to a specific purpose. Allocate income to necessary expenses first and then to discretionary spending categories. If there’s any money left over, make sure to assign that a purpose as well. For example, you may want to allocate extra to savings that month.

For this method, you can start with your average monthly income and adjust in real time if you are having a month where your earnings are higher or lower than expected. More on that in a minute.

Also know that there are a variety of budgeting methods worth considering, including the 50/30/20 budget rule and the envelope system. It can be useful to give more than one a try to find the one that works best for your personal habits.

Not Getting Overly Comfortable When You Make More Than Usual

Remember that months that are more flush with cash may be a temporary situation. Be mindful not to take on more financial responsibilities than you’ll be able to maintain if your income drops. For example, think twice before taking on costly loans, such as one for a new car. If you can’t afford the payments in leaner months, consider cheaper alternatives, like buying a used car.

It can also be wise, in months when you are feeling rich, to funnel some of those funds into savings for leaner months and future goals. Tempting as it may be to plan an impromptu beach weekend when your bank account balance is high, it may be better to reward yourself with a day by the shore plus a nice lunch instead.

Preparing for Months With Low Income

About those leaner months we just mentioned: If you know your income will vary from month to month, consider keeping a buffer of cash that can help protect you from shortfalls as your income varies. You might consider a buffer equal to the difference between your income in your highest earning month and your lowest earning month. If you dip into this cash reserve, be sure to replenish it in months in which you make more money.

This money, sometimes called a cash cushion, can see you through lower-income months and also protect you from overdraft and credit-card debt scenarios.

Making Adjustments to Your Budget When You Get Paid

Having an irregular income means you’ll need to take a more hands-on approach to budgeting throughout the month. As income rolls in, you can make adjustments to your budget. If you have a zero-sum budget, be sure to put that money to work immediately. For example, you may find you have more money than you thought to allocate to savings or discretionary categories.

If you don’t receive income you expected during the month, look for ways to make cuts to your budget or put off big purchases until another time.

Tracking All Expenses

When you track expenses, as you spend money in a certain category, you subtract it from the line item in your budget. That way, you’ll always know how much you have left to spend.

Keeping track of your spending throughout the month is critical. It not only helps you stay on budget, but understanding where you spend can enable you to tweak your future budgets and identify trends in spending. For example, you may notice you tend to spend more on clothing at certain times of year. You can then plan ahead for that expense or find ways to curb it.

Many people shy away from expense tracking because it feels time-consuming and, let’s face it, boring. But there are plenty of methods available to make it easier and fun (or almost). Consider using a customizable spreadsheet you find online. There are also plenty of apps that make it simple to track your spending data in real time, automatically categorize transactions, and even set and monitor goals. Technology can really make your life easier on this front.

Continue to Build Your Emergency Fund

You never see it coming: that pricey car repair or dental bill that can send even the best budget reeling. That’s where an emergency fund comes in, giving you cash to get through a challenging moment. (It also delivers peace of mind, which is a form of financial self care.) Experts recommend that you save three to six months’ worth of average expenses in a dedicated savings account. Often, online banks have top rates in what are known as high-yield savings accounts.

Your emergency fund should be separate from the cash buffer you keep from month to month to help you cover shortfalls in income. You don’t want your emergency fund to dwindle away on everyday expenses. It’s best to keep it aside in case something occurs that is truly an instance of when to use your emergency fund.

Investing Your Money

Make investing for your future a part of your financial plan, even when you are budgeting with an inconsistent income. Compounding interest can really help your funds along, so do start saving early and keep at it.

You may even want to include investing in a retirement account as part of your necessary expenses. It can be helpful to automate those savings. You can have a set amount sent from your checking account to your retirement account each month, regardless of which type of retirement plan you have.

Recommended: Tips for Creating a Financial Plan

The Takeaway

Whether self-employed or a seasonal or shift worker, many people have irregular income month to month. Though budgeting may not exactly be most people’s idea of fun, if you have a fluctuating income, it’s an important practice. By tracking your income, expenses, saving, and spending, you can likely avoid being caught short with regular budgeting. This, in turn, will help keep you out of debt and help your wealth grow.

Speaking of having your wealth grow, whatever your income may be month to month, SoFi can help. When you open a new bank account online with direct deposit, we won’t charge you any of the usual fees, plus you’ll earn an amazing 2.50% APY. Zero fees and a stellar APY are a true win-win. You’ll also enjoy easy tools that help you organize your financial life.

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FAQ

Will budgeting work if you have an irregular income?

You can build a budget with irregular income. However, you must be diligent about tracking both your income and your spending in real time to make sure you stay on top of your money. Online spreadsheets as well as budgeting apps can help you with this process.

What are examples of irregular income?

Irregular income can take many forms. Some examples include being a freelance worker (whether you are a web designer or a personal trainer), contractor worker, hourly or seasonal employee, or a person who works on commission.

What is the difference between regular income and irregular income?

Regular income is a set amount of money received at regular intervals, such as from a salaried job or a passive source like rental income. Irregular income, on the other hand, can arrive unpredictably and can fluctuate from month to month. It’s also important to note that those who earn irregular income may need to set aside money for taxes, unlike many workers who receive a regular paycheck.


Photo credit: iStock/andresr

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