Budgeting can be challenging even with a stable income, but it becomes much more complex when your income fluctuates. Many freelancers, gig workers, seasonal employees, and commission-based professionals are familiar with the uncertainty of irregular compensation. With the right strategies, however, you can come up with a budget that allows you to manage your expenses, save for future goals, and feel less stressed about money, even during those lean months. Here’s a basic guide to budgeting with a variable income.
Key Points
• Calculating your average monthly income over the past 6-12 months provides a stable baseline for budgeting when your earnings fluctuate.
• Reviewing and categorizing your expenses helps identify where your money goes and highlights areas where you can reduce spending.
• It’s a good idea to set clear short- and long-term financial goals so you stay committed to your budget and prioritize savings.
• A zero-sum budget assigns every dollar a purpose, helping you balance spending, saving, and debt repayment even with inconsistent income.
• Building an emergency fund is especially important with irregular income, as it provides a financial cushion during low-earning periods or unexpected expenses.
Tips for Budgeting With an Irregular Income
Just because you don’t get a regular paycheck doesn’t mean you can’t build wealth and achieve your financial goals. These tips can help you manage your up-and-down paychecks and feel more in control of your finances.
1. Determine Your Average Monthly Income
The first step in budgeting with an irregular income is to determine your average monthly take-home income. This can be tricky since your earnings vary, but you can get a reasonable estimate by looking at your income over the past 6-12 months.
Start by gathering your bank statements for the last 6-12 months, or if you get e-statements, log into your online checking account. Next, add up all of your income for the time period you choose, then divide it by the number of months. This gives you an average monthly income, which will serve as a baseline for your budget.
Something to keep in mind: If you earn money from side gigs or freelancing, you’ll want to subtract anything that reduces it, such as taxes and business expenses.
2. Analyze Your Spending
Once you know how much money you have coming in, the next step is to figure out where it’s all going. You can do this by looking at your bank and credit card statements over the past six months and then listing and categorizing your expenses. This will show you what you’re spending the most money on and where it might be straightforward to save. Some tips that can help:
• Begin by listing your fixed expenses. These are regular monthly bills, such as rent or mortgage, utilities, and car payments.
• Next, list your variable expenses. These are the expenses that may change from month to month, such as groceries, gas, and entertainment. This is an area where you might find opportunities to cut back.
• Consider tracking your spending. To get a better sense of your spending, you may want to track it for a month. Simply record your daily spending using whatever method you prefer — pen and paper, an app on your smartphone, or a budgeting spreadsheet found online.
3. Set Some Goals
Before you begin analyzing the data you’ve gathered, it’s a good idea to jot down your short- and long-term financial goals.
Short-term goals are things you want to accomplish within the next few years. This might include establishing an emergency fund (more on that below), reducing credit card debt, going on vacation, or putting a down payment on a home. Long-term goals, such as saving for retirement or funding your child’s education, may take decades to accomplish.
Identifying these objectives can inspire you to stick to your budget. For instance, it might be easier to reduce expenses when you’re aware that you’re saving for a new car or a tropical vacation.
4. Consider Using the Zero-Sum Budget
There are many different types of budgets, but the zero-sum budgeting approach can work particularly well for people with fluctuating income.
With this method, every dollar of your income is assigned a specific purpose, including saving and paying off debt. You’ll treat your short- and long-term financial goals as “expenses,” just like rent, utilities, and any other monthly expense. So if you make an average of $5,000 a month from your variable income, everything you spend or save during a month should add up to $5,000.
To make this budget work with a fluctuating income, you may want to take your average monthly income and use it as a salary for yourself. During months when your salary is higher than the average, you’ll put the surplus into a separate savings account. During months where your income is lower than the average, you’ll draw the additional funds from that account. In this fashion, you end up with the same salary every month.
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5. Start Building An Emergency Fund
An emergency fund is important for everyone, particularly for people with inconsistent income. This is an account you can turn to should you get hit with an unexpected expense (such as a big home or car repair) or to cover your essential expenses should your income take a hit. While the general rule of thumb is to keep three to six months’ worth of living expenses in a separate savings account for emergencies, those with fluctuating income may want to aim higher. An emergency fund calculator can help you determine how much money you should set aside.
Once you come up with a goal amount for your emergency savings, consider these ways to fund it:
• Open a separate account. To ensure you don’t actually spend the money on something else — and to allow your money to grow while it’s sitting around — consider opening a high-yield savings account specifically earmarked for your emergency fund. You can generally find the best rates at online banks.
• Automate your savings. Once you determine how much you can put toward your emergency fund each month and factor it into your budget, consider setting up an automatic monthly transfer into your emergency account. It’s fine to start small. Regular deposits will build over time.
• Take advantage of windfalls. Consider allocating any windfalls that come your way, such as a tax refund, cash gift, or bonus, to your emergency fund to accelerate your progress.
Once you build your emergency fund, you can put your monthly transfer toward other savings goals.
The Takeaway
The foundation of any budget is your net (take-home) monthly income. To come up with that number on a fluctuating income, you’ll need to look at the last 6-12 months of income and come up with an average. You can then determine how you want to divvy up that money up so you can cover your necessities and work toward your goals while enjoying your life.
The zero-sum budget is one option you can try, but there are many other types of budgets. The goal is to get to a place where you won’t overspend during the high times or worry during the low times because it’s all factored into your budget.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Will budgeting work if you have an irregular income?
Yes, budgeting can work with an irregular income. Most budgeting approaches start with your net (after tax) monthly income. To come up with that figure with a fluctuating income, you’ll want to look at the past 6-12 months of your income, assess the average monthly income, and then determine what your average monthly spending is, see how it compares, and make any necessary adjustments to your spending.
What are examples of irregular income?
Irregular income refers to earnings that vary in amount and frequency. Examples include:
• Freelance work
• Seasonal jobs
• Commission-based sales
• Side gigs
• Bonuses and tips
What is the difference between regular income and irregular income?
Regular income is a set amount of money received at regular intervals, such as weekly, biweekly, or monthly. Examples are earnings from a salaried job or a passive income source, including rental income.
Irregular income, on the other hand, varies in amount and frequency. It includes freelance payments, seasonal work, commissions, and gig economy earnings. The key difference lies in the stability and predictability of the income stream.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
Photo credit: iStock/andresr
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