How to Budget When Your Income Fluctuates

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Tips for managing the financial ups and downs of freelance, seasonal and commission work.

For many folks who are self-employed, do seasonal work or work on commission, the weather can seem more predictable than their income. If you’re one of the millions whose income fluctuates from month to month, you need a solid plan for keeping your finances in order.

Savings are your best friend
In some lines of work, such as real estate for example, there may be months where you do a lot of work but receive little to no income. Having a reserve of three, six or even 12 months of living expenses in a savings account can ease the stress during the slower months. Check out our tips for building an emergency fund without feeling deprived of the things you want.

Know how much to save
To determine how much you need to save, you need an accurate picture of your bare-bones budget. This number will vary by individual but for most people it’s a sum of the essentials, including:

  • Rent or mortgage
  • Cell phone
  • Utilities
  • Insurance (health, car, home, auto)
  • Food
  • Childcare
  • Taxes
  • Anything else that’s essential to you or your family

If you’re new to budgeting, listen to this Money, I’m Home podcast on how to start a budget.

Did you notice taxes in the list above?
Self-employed people can find themselves in financial hot water if they overlook the fact that they have to pay income taxes. It’s easy to do if you’re new to independent work or have always worked for an employer who deducted taxes before you received a paycheck.

For self-employed earners, the IRS requires quarterly payments of estimated taxes. The best way to make sure you’re not short of funds when the tax bills are due is to estimate your total tax for the year, divide that figure by 12, and save that amount each month. Many people set up a dedicated savings account just for taxes. As always, we encourage you to consult a knowledgeable tax advisor about your individual situation.

Get a handle on discretionary spending
Discretionary expenses include anything that’s not absolutely necessary. Take a look at your cable bill, dining out habits, entertainment expenses and everything else you spend money on. Until your emergency savings is at a level you’re comfortable with, rein in all unnecessary spending.

Pay yourself a salary
When income is abundant it’s tempting to spend every dollar that comes in. Especially if money has been tight, it can feel good to treat yourself or loved ones. However, your overall finances will be better served if you draw a set salary each month and save any funds in excess of your salary.

At a minimum, your salary needs to cover your bare-bones budget. When your income allows, pay yourself more than the minimum so you can enjoy life more. After all, all work and no play makes for a dull life. When your income exceeds your salary, put the extra in savings.

Keep your retirement in mind
Self-employed folks don’t have the benefit of an employer-sponsored retirement plan. Many people with fluctuating income designate a percentage or dollar amount to set aside in an individual retirement account (IRA). Time is your ally when it comes to retirement savings because of the power of compounded interest.

Don’t be discouraged
Setting aside enough savings to cushion the months where your income is low or zero, saving for taxes and setting aside money for retirement can feel overwhelming. While managing finances with fluctuating income is challenging, it’s not impossible. In fact, millions of people do so every day, including many Consumers members just like you. If you need help, take advantage of free financial counseling from GreenPath Financial Management, one of the many perks of being a Consumers member.

Consumers provides banking services for more than 117,000 members. If you have banking questions, call us at 800-991-2221. We make it easy to bank how you want, when you want.

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As part of the Consumers family, you have free, unlimited access to financial management services.

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