A lot of the budgeting strategies out there assume that you get a regular paycheck—a nice steady stream of cash flowing your way every month. But what if your income isn’t so predictable? With variable income, your cash flow looks less like a steady stream and more like waves in the ocean: up in some months, and down in others.
Figuring out how to budget with variable income can be tricky. Lots of people have work situations that make it hard to predict income every month, like:
- freelancers, contractors, or gig workers
- folks who moonlight or work a side hustle
- people working retail or in restaurants (and other jobs with hourly pay and variable hours)
If this sounds like you, you can learn to surf the waves of variable income with confidence! Figuring out how to create a budget when your income fluctuates is all about knowing what you can control, prepping for what you can’t—and creating smart ways to stay on track.
One caveat: If you’re running your own business, heads up that we won’t cover small business issues here. But for your personal finances, read on to learn how to budget with variable income and get tips for smoother sailing across the financial-fluctuation seas.
Make a budget for irregular income in 4 steps
1. Calculate your baseline income
When your income varies, you need to get clear on the minimum amount you need to live on each month. Make a list of all your truly essential expenses—everything you absolutely need to pay for every month, no matter what.
What’s essential? That’s a decision that only you can make! Common essential expenses are housing, food, health care, transportation, utilities, and debt payments—but what you truly need is going to be unique. While making your list, think about your goals, values, and priorities to help you determine what feels crucial for your life.
Now add up the monthly cost of every essential expense: this is your “baseline” of how much money you need to have every month. Of course, you’ll have plenty of other things you want to spend money on—including things that feel very important—but the idea here is to start budgeting with the amount of money you need for the things you really can’t live without.
2. Build your “essentials” budget
Use your list of essential expenses to create a budget—someplace to track each monthly expense and the amount of money you need for it (if you’re a Simple customer, here’s how to do that right in your Simple app).
Make sure you leave yourself some wiggle room for expenses that vary a bit from month to month (like groceries) and potential surprises. (Hint: a “miscellaneous” line item can be handy for this.)
By starting with an “essentials” budget, you’ll have a plan to cover the things you absolutely need, even when your income fluctuates. To keep yourself organized, consider adding “essential” to the name of each of the expenses in this budget so you can easily see what you need to fund, even when you add additional expenses to your budget in the next step.
3. Add “optional” expenses to reflect your average income
To budget with irregular income, it’s handy to have a budget that reflects your average monthly income in addition to the bare-bones “essentials” version. So now it’s time to add in all the “optional” expenses that, ideally, you’ll have money for every month.
Review your income over the past year and figure out what you make each month on average. Then go back to your goals, values, and priorities—use them as the guide for adding expenses (and any savings goals) that you want to put money toward.
Again, keep yourself organized by making sure you can clearly see which expenses in your budget are essential (aka, must be paid each month) and which are optional (and can therefore be skipped if you have a tight month).
Note: it’s not very helpful to make a pie-in-the-sky plan here. Add in the expenses that feel reasonable based on what your income usually is. This is also the place to include savings goals for larger purchases you’ll need to make down the road.
4. Set up a “slush fund”
Psst…this is the real secret to budgeting with irregular income: you don’t want to spend all the money you make every month. Instead, whenever you make more than you need to cover your expenses, allocate the rest of the money to a “slush fund” to cover those low cash flow months in the future. This will enable you to weather the waves of variable income.
It’s a good idea to keep your slush fund in a separate account so you can’t accidentally spend it. Then, if you have a month where your income is lower than your essentials budget, you can pay yourself from your slush fund to make up the difference.
If you’re a Simple Customer, you can open a Protected Goals Account, where your money is safe from accidental spending (and earns interest!), but easy to access instantly when you need it.
5 smart strategies for managing variable income
1. Live on last month’s money
Many people spend their paycheck as soon as they earn it. If you have a predictable income, you get your check on payday, and that’s your money for the next two weeks. You may be eating ramen for every meal on the 14th of the month, but you know another check is coming on the 15th!
But when your income fluctuates, you can’t always count on when the next paycheck will arrive or how much it will be, so it’s a good idea to think of the money you earned last month as this month’s “paycheck” (just like you’d do if you had predictable income but only got paid once a month).
For instance, set aside all the money you earn in August, then “pay” yourself that money on September first—that’s your income to spend in September. Meanwhile, don’t touch the money you earn in September until October comes along.
Living on last month’s money (along with having a slush fund) gives you a financial buffer to manage the cash flow waves that come with variable income. If you’ve been living check-to-check, implementing this approach may take a little time. But if you’re able, see if you can work toward it (for instance, by putting aside a portion of what you earn each month to “pay” yourself next month, and increasing that portion slowly over time) until you’re able to shift fully to this cadence.
2. Prioritize building an emergency fund
So you’ve got a slush fund and you’re living on last month’s money, riding the waves of your variable income—what about life’s big financial curveballs?
When your income varies, it’s even more important to prioritize building an emergency fund. This is different from your slush fund: the slush fund covers the normal variation between months, while the emergency fund is for big unexpected expenses, like if you get sick for a long time, totally lose your income, or your car is totaled.
So when you’re creating your budget, make it a priority to put money into an emergency fund. Ideally, we’d all have enough money socked away to cover at least six months’ worth of expenses, but that’s not a realistic goal for many folks. But don’t give up! Even having enough to cover a month or two of essential expenses can make a significant difference in your financial resilience. (Here are some tips on building your emergency fund faster.)
3. Be selective about your commitments
One risk when budgeting with irregular income is having long-term financial commitments, like phone contracts, memberships, and anything else that creates a monthly expense you can’t escape without a penalty. While some commitments are inevitable (like your lease or debt payments), there are many expenses where you have the option not to be locked in.
Make sure you check the fine print when you sign up for that new phone or subscription service. If you can find an option that allows you to cancel with no penalty, you’ll have more flexibility for low-cash-flow months.
And don’t forget to keep a close eye on those free trials! There’s a sneaky auto-debit coming your way if you miss the cancellation deadline, so set up a reminder to cancel before you get charged.
4. Use credit with extreme caution
Debt is one more monthly expense you can’t escape. Using credit is always risky, and that’s especially true when your income varies.
Credit cards can be pretty appealing when you have a lower-than-usual income month, but credit card payments create another essential expense. And if you can’t cover those payments one month, you’re likely to rack up fees, penalties, and extra interest.
For many people, it’s unrealistic to never use credit, but it’s a good idea to think of it as a last resort reserved for emergencies.
5. Sort out your tax situation
Taxes—they’re inevitable, and they can be tricky! Depending on your work situation, you might need to budget for taxes you’ll owe on your income.
Every situation is different, but the basic thing you need to know is this: if you are considered an employee (aka, you get a 1040 for your taxes at the end of the year), your employer should be withholding taxes from your paychecks. But if you’re a contractor (so you usually get 1099 instead—this is often the case for freelancers and gig workers), your checks haven’t had any taxes taken out, so you need to take care of that yourself.
And if you’re in the latter group, you might need to pay your taxes quarterly or owe self-employment tax—and that can add up to a big surprise bill at tax time if you haven’t planned ahead!
Take a good look through your pay stubs to find out what taxes, if any, are being withheld from your pay. If taxes aren’t being withheld, you’ll need to tuck money away from every check to pay the IRS.
If you’re not sure whether you’re classified as an employee or aren’t sure if taxes are being withheld, it might be smart to talk to a tax pro and find out what you need to do. You might also want to read up on the legal difference between employees and independent contractors and be sure you’re classified correctly—this article from FindLaw is a good overview.
Keep your budget on track
1. Find a system that lightens the load
Keeping close track of your income and expenses is extra important for budgeting when your income fluctuates. Do some research to find a system that makes it easy to stay organized and automates the legwork as much as possible (here’s a NerdWallet article to get you started). If you’re already using Simple, here’s how you can track your Expenses in your app.
2. Curb impulse spending
Make sure you’ve given yourself some room in your budget for fun and treats—feeling deprived tends to lead to impulse spending, which can totally derail your long-term planning. You can also keep on-a-whim purchases in check by setting up “spending barriers,” like deleting payment information from your phone so you can’t do “one-click” purchases, or only bringing cash when you go out for happy hour.
This guide has even more tips to help you live within your means.
3. Trim your expenses
It’s always a good idea to look for ways to save money, and it’s especially helpful if you’re not sure how much money you’ll make each month. Take a look at these life hacks for saving money and some ideas on how to save on streaming services.
4. Schedule regular budget sessions
When your income varies, you’ll need regular check-ins to see how things are going. Weekly is a good frequency to shoot for, and your money dates are a great opportunity to make tweaks to your system as you notice trends and learn!
If you and your partner share expenses, this is the perfect opportunity to have a financial date night to keep your joint budget on track too. Here’s a guide for budgeting better together. (And if you live with a roommate, this blog post has tips for you!)
5. Give yourself financial high-fives
While budgeting can make you feel more confident and in control, it can also be stressful at times, especially if you’re feeling uncertain about your income. Consider scheduling something fun for yourself after your budget sessions to celebrate the win of sitting down and crunching the numbers.
The ups and downs of budgeting with variable income can be a challenge, but you can learn to surf the waves with style! Budgeting for your essentials and managing your cash flow will help you feel more confident as you navigate that financial sea. As you watch your budget work for you, you’ll feel more and more confident knowing that you can weather any storm.
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