How do you budget with an inconsistent income?

Tips for budgeting with changing income

Some people need an updated, easy-to-follow budget to help develop and manage their financial plan. But it’s hard to do when your income isn’t the same each month or quarter.

1. Make your budget annual, not monthly—Consider creating your budget based on your annual income and expenses to get an accurate representation. Try not to focus on monthly bills—look at the total for the year. For an estimate, you can then divide everything by 12 to look at an average month, even if you may not have an average month.
2. Lowball your income projections—When you come up with your budget number for the year’s income, try aiming low. You don’t want to overpromise and then, perhaps, be unable to pay your expenses. Then prioritize covering your expenses. If you end up making more money, great! Consider having a savings and investing plan for your excess income. 
3. Know when your big-ticket expenses are due—Make sure you know when your big expenses are due each year, such as income taxes or annual insurance premiums. This is even more important when your income comes in waves and you might rely on your cash savings, or buffer, to make these large payments.

Here are some additional tips to consider:

• Review and update your budget periodically to capture any changes from year to year, such as paying off a car loan or buying a house
• Think about setting up automatic payments for fixed expenses to help avoid late fees—as long as you know you have a dependable buffer built into your account
• Track your spending to pick up on any spending trends that could hurt your progress toward your goals

Building your buffer—it’s not the same as an emergency fund

When your income varies, consider having at least two cash accounts—a cash buffer and an emergency fund. Your cash buffer is money you can let build up in the account you use to pay your regular bills, such as a checking account. It’ll most likely jump and fall throughout the year due to your fluctuating income and expense payments. Your emergency fund should be for unexpected bills only.

During your higher-earning months, you’ll probably feel like you have excess cash available in your buffer. Remember—it’s there on purpose, for the month when you may not bring in enough to pay your bills. Consider being disciplined and stick to your budget.

If you’re saving cash for a short-term goal, such as buying a house, think about putting that money in a third cash account to keep your money separate. Keeping your money in different accounts can help you spend the money on what it’s intended to go toward. Also, seeing multiple smaller buckets of cash might make it less enticing to spend than one large bucket. 

Retirement planning with inconsistent income

Investing for retirement when your income fluctuates is probably no different than people with a nine-to-five salary. It’s about creating a routine and being consistent. 

Participating in your workplace retirement plan, such as a Taft-Hartley plan, can be an effective way for you to help build your retirement savings. You can consider:

• Adding to your account regularly, if your plan allows it
• Building savings for retirement into your budget
• Taking advantage of dollar cost averaging, the process of buying more of an investment when prices are low and less when prices are high¹
• Earning interest on your interest—something called compound earnings—which can help increase your retirement savings the longer you invest²

If you don’t have a workplace retirement plan, consider setting up an individual retirement account (IRA), which allow you to contribute until your income-tax filing due date. That means you have the option to add to last year’s retirement savings limit even after December 31, if you need the extra time.

Handling your debt

Some people prioritize paying their highest-interest debt first. Others focus on their smallest balance. Whichever strategy you choose to reduce your overall debt, making timely payments is an important consideration. Inconsistent earners should think about a few additional strategies:

• Prioritize minimum payments—Pay the minimum amount to help avoid penalty fees and negatively affecting your credit score. Think about increasing your payments when you know your budget will support them.
• Consider debt consolidation—Combining your debt may be especially helpful for you to simplify your finances. When you consolidate, you work with one company if you want to negotiate your payment terms (e.g., frequency or minimum payment amount).

Managing inconsistent income requires a good memory

When you have extra cash and the urge to spend more on things you want, remember the weeks or months when you’re not earning money, or at least not as much. Consider growing your buffer to continue paying your bills all 12 months of the year. Try sticking to your budget (including savings and investments), not overspending, and keeping your debt in check to help you successfully manage your inconsistent pay cycles and achieve your financial goals.

1 Dollar cost averaging does not guarantee a profit or eliminate the risk of a loss. Systematic investing involves continuous investment in securities, regardless of price-level fluctuation. Participants should consider their resources to continue the strategy over the long term. 2 Assumes no withdrawals; does not take into account fees associated with investing, which, if included, would reduce an account balance; and assumes reinvestment of earnings.