Published in: Banks | July 26, 2019

How to Manage Money When Your Income Is Different Every Month

By:  Lyle Daly

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Your income may change each month, but that’s no reason to play it fast and loose with your money.

Man analyzing laptop that's displaying charts and graphs.

Image source: Getty Images

Not every profession comes with a steady paycheck. If you’re part of the growing number of freelancers, or if you have a job where your pay depends on your performance, such as sales, then you’ll need to know how to manage your money with a fluctuating income.

Money management can be tough for anyone, but the difficulty ratchets up even more when you’re making a different amount each month. You won’t have a fixed income that you can use as a baseline for your budget.

If you’re not careful, you could end up short on cash when your bills are due. Fortunately, there are a few money management strategies you can implement that will keep you safe and sound financially.

Estimate your income range

Although you don’t have a set amount you make every month, you can still figure out your approximate income range.

To do this, you’ll need to calculate your income each individual month for the past six months to one year. The longer the time period that you choose, the more accurate your income range will be. Note that you should only use months when you were doing the same work that you currently do.

If you’re not sure how you can get this information, your best bet is to request your bank account statements for this time period. Banks usually maintain records of account activity for the past five years.

Once you’ve calculated your income for each month, pick out the lowest and highest amounts to get your income range. For example, if you made $3,500 during your slowest month and $6,000 at your peak, then your income range is $3,500 to $6,000.

Budget based on your minimum income

Using your income range, you can now put together your budget. The safest option is to budget as if the low end of your income range is the amount you make every month.

Start by listing all your essential expenses, which are the ones you must pay every month. These include:

  • Housing
  • Food
  • Utilities
  • Health insurance
  • Transportation
  • Cell phone service

A good goal here is to spend no more than 50% of your minimum income on these essentials.

Next is your discretionary spending. This is anything that you want to have but isn’t necessary, such as dining out or a subscription to a video streaming service. Your discretionary expenses should be 30% or less of your minimum income.

Finally, there’s your savings. You should be saving at least 20% of your minimum income.

By making a budget based on your minimum income, you’re unlikely to have any months where you’re losing money.

Increase your savings when you earn more

When your budget uses your minimum income, then more often than not you’ll end up with extra cash. This is a great opportunity to add to your savings account.

Now, you don’t need to save every extra dollar you make. If you want to treat yourself after working hard and having a successful month, it’s perfectly fine to use some of that surplus for discretionary spending.

A smart approach here is to decide on a certain amount of your extra income that you’ll save no matter what, such as 50%.

Make sure you have a healthy emergency fund

An emergency fund is a must for everyone, but it’s especially important when your income can change. You have one extra emergency to think about that people with a steady paycheck don’t -- the possibility of having a bad stretch where you make far less money than usual.

The most common advice about emergency funds is that you should have enough money to live off of for three to six months. It’s also a good idea to save more if your income is volatile, so you’ll want to aim on the high side with your emergency fund if your income fluctuates quite a bit from month to month.

Your emergency fund is what you’ll dip into if you ever have a month where you don’t make enough to cover your bills. Just make sure that you replenish the account as soon as you can.

Don’t forget about your taxes

If your income fluctuates because you’re self-employed or freelancing, then one final thing you’ll need to remember is your taxes. You’re required to pay your own self-employment taxes, which are currently 15.3% as of 2019, plus federal and potentially state income taxes.

Many a freelancer has gotten an unwelcome surprise once tax time rolled around. You should save at least 25% of your income specifically for taxes and make estimated tax payments every quarter.

Staying on top of your ever-changing financial situation

It’s certainly more challenging to manage money when your income isn’t consistent, but that’s also an important reason why you need to budget wisely. If you’re not careful, you could fall into the trap of overspending because you figure you just need one good month to make up for it.

That’s a mindset that can lead you into debt. By sticking to the advice above, you’ll be able pay all your bills and build your savings, even in your slowest months.

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