How Can You Budget on a Fluctuating Income?

If you’re a contractor, gig worker, or freelancer like me, you likely have a fluctuating income. Because your monthly income is unpredictable, the good times can feel great, while the lean times can be difficult.

Although you might be unable to control when you get paid or the size of your paycheck, you can control your money and manage these financial extremes. The following strategies can help.

1. Determine Your Average Income and Expenses

Understand how much money is coming in and how much you are spending, which is especially important if you have radically high- or low-income periods.

Start tracking your savings and spending habits now to develop accurate data on your average income and expenses:

• Consider using a budgeting or spending app, a spreadsheet, or a pen and notebook to track your monthly income and expenses.

• Focus on data from previous months or years to calculate your monthly averages.

• When you have documented six months’ worth of income and expenses, divide the total by six to determine your average monthly income and expenses.

2. Consider Developing a Zero-Sum Budget

A zero-sum budget allocates every dollar toward a purpose, such as savings, bills, and goals.

• Treat your savings goals as expenses, such as building an emergency fund or saving for a down payment on a home.

• Create a “salary” for yourself that covers your average monthly expenses.

• Because your income and expenses should even out, nothing is left over at month-end.

To illustrate, if your monthly bills, groceries, business expenses, savings goals, and other necessities add up to $5,000, this amount is your monthly salary:

• During the months when you earn over $5,000, put the additional money into a separate savings account.

• Conversely, during the months when you earn less than $5,000, draw from this account to increase your salary to $5,000.

• This “boom and bust” fund lets you build your savings and pay your required monthly salary to cover your expenses.

3. Separate Your Saving and Spending Money

Keeping your savings and spending money in separate accounts reduces the temptation to pull from your savings goals during low-income months. Keeping your savings in a high-interest rate savings account encourages you to think twice before dipping in.

Consider having your earned income deposited into one account and disbursing it into separate savings and spending accounts:

• Transfer a specific amount on the first of the month to a bill pay account and a specific amount to a spending account.

• Use your bill pay account to cover regular expenses that generally stay the same, such as your mortgage or rent, insurance, car payment, and student loans.

• Use your spending account to cover variable expenses such as groceries and gas.

• Consider setting aside money in your savings account for long-term goals, including retirement.

• If you are an independent contractor or freelancer, set aside money to pay your income and payroll taxes quarterly.

4. Build Your Emergency Fund

Set aside three to six months’ worth of expenses to cover unexpected events such as car or home repairs, medical bills, or job loss. An emergency fund can help pay your bills if you become stuck in a low-income period longer than expected. Once your emergency fund is full, start saving additional money for your goals, like a vacation or homeownership.

*This information is for educational purposes only.

Do you have experience budgeting on a fluctuating income? Let me know in the comments!