Fri | Jan 15, 2021

How to save on an inconsistent income

Published:Tuesday | October 30, 2018 | 12:00 AMLatara Boodie

While the freelance life commonly touts flexibility and greater earning potential, there are also financial downsides. A major one is struggling with variable income. For freelancers, it's awesome when you experience a spike in your income one month, but pretty terrible when your income drops the next. Since a lot of common budgeting advice is based on the assumption that one gets a steady pay cheque, how can you come up with a spending plan? One that helps you not only stay afloat, but where you can make steady progress on your saving goals.

Here are some tips on how you can budget when you deal with inconsistent income:


Keep a robust, rainy day fund


While an emergency fund is an essential part of any budget, how much should you save when you experience variable income? The general rule of thumb is three to six months of living expenses. When you have to deal with peaks and valleys in your cash flow, you'll want to keep a robust, rainy day fund as possible. Aim to have at least six months of living expenses. Besides an emergency fund, having a buffer fund to get you through any gaps in income will help you pay your bills on time. Aim to keep about one month of living expenses in your savings account.


Anchor yourself on your lowest pay cheque


When your income fluctuates from pay cheque to pay cheque, depending on how many sources of income you have, try basing your budget on your lowest pay cheque. When you anchor yourself on your lowest pay cheque, you'll feel better. Plus, all the additional money that comes in on good weeks will feel like a bonus! This will help to keep your expenses low so you don't have to struggle with financial stress when you have a lull, which is inevitable.


Make the most of 'extra pay cheques'


If you work a bunch of side hustles and get paid every Friday or every other Friday, there are two months of the year where you get an 'extra pay cheque'. While tempting, avoid spending this money on today's wants. Instead, spend it on tomorrow's needs. Put the extra money towards paying off your credit card, going to the dentist, or into your car repair or rainy day fund.


Save when you get paid


Research says 'set and forget' money management is the best way to achieve your financial goals. However, it's tough when your income fluctuates wildly. One easy way to avoid this is to set up an automatic savings withdrawal for the times when you do have extra money.


Total up your income


Map out your projected income for the year and do a 12-month cash flow to see what your actual peaks and valleys in income are. Often, freelancers live month to month because income feels 'unpredictable,' but you've been freelancing for a while, so you will have seasons of income. Being aware of when those will give you an idea of how to plan for the low- and high-income months. To figure this out, track how much you've made on average in the last three months, or the last six months. If you've been freelancing for more than a year, you can base your yearly income from last year's.