Trying to Save on an Irregular Income? Here's Ramit Sethi's Advice

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KEY POINTS

  • The uncertainty of a variable income can make it harder to save money.
  • A good strategy in this situation is saving a specific percentage of your income every month.


When your income goes up and down, it's even more important to have the right savings strategy.

Saving money is something that a lot of people struggle with. And while it's challenging enough with a stable income, it's even more difficult for those living on an irregular income, like freelancers, gig workers, and business owners.

Some people in this situation get into the habit of neglecting their savings. They feel less urgency to do it during the good months, so they miss opportunities to boost their savings. During down months, they want to save more because of financial stress, but they don't have nearly as much disposable income available.

These are common issues, because saving is tricky when you don't know how much you're going to make each month. But Ramit Sethi, writer of "I Will Teach You To Be Rich," has advice that can help.

Pay yourself first

The first thing Sethi recommends for managing a variable income is to pay yourself first, a popular financial rule that anyone can benefit from. When you get paid, start by sending money to your savings accounts and investments. Do this before you buy anything or pay any bills.

One of the reasons people don't save money is because they leave it for last. You tell yourself that you'll save what you have left over at the end of the month. But often, that ends up being very little or nothing at all. By prioritizing your savings, you ensure that you add to it consistently.

That solves one issue, but you also need to figure out the amount you're going to pay yourself. So, how can you decide that when your income is always different?

Know your percentages

Sethi's advice is to go with a percentage of your income. A popular option is paying yourself 20% of what you earn. You could then divide that evenly and put 10% in your savings and the other 10% in your investments. For example, if you make $5,000 one month, you'd pay yourself $1,000. If that drops to $3,000 the next month, you'd pay yourself $600.

This is a great strategy because it means you're putting aside a reasonable amount no matter how much you make. You save larger amounts overall when you can afford it and less when money is tighter. It's also a simple plan to follow once you know your percentages.

How to get started

The main item to figure out for this is the percentage of your income that you're going to save. It needs to be an amount you can reliably save even during your least-profitable months. For that reason, I recommend taking a look at your budget and comparing your regular living expenses to the lowest amount you typically earn. Use that to establish a realistic savings percentage.

Let's say your normal monthly expenses are $3,000 and you make anywhere from $4,000 to $6,000 per month. A savings rate of 20% would be doable. During a $4,000 month, that'd be $800 in savings, so you'd still have a little room to spare.

It's important not to choose a savings rate that's too high. You don't want to set yourself up for failure with a goal you won't be able to reach in certain months. Remember, you can always save more during the good months. The savings rate you choose is just the minimum you'll aim for.

Once you have your savings rate, decide how you'll divide it between savings and investments. A 50/50 split can work well, but this all depends on your current personal finance situation. If you're trying to bolster your emergency fund, you may want a more savings-heavy split for now. If you feel comfortable with your savings, leaning more toward investing your money could make sense.

Even with a variable income, saving money doesn't need to be overly complicated. Pick a savings rate that works for you, get into the habit of paying yourself first, and you'll be happy with the results.

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