4 budgeting tips for fluctuating income

Irregular income refers to earnings that change from month to month and don’t follow a set schedule. If you have an irregular income, you know how great the good times feel—and how tough the bad times can be.

Freelancers and contractors often can’t control when they get paid or how much each paycheck will be. This uncertainty can make it harder to plan for regular expenses and manage your money. However, reviewing budgeting basics can help you take control of your money.

Creating a budget with an irregular income can require big-picture thinking. You may need to test different plans when you first start budgeting.

How do you budget with an irregular income? Think about these four budgeting tips for fluctuating income to help you feel more confident with your money:

The first budgeting tip for fluctuating income is to understand how much money you have coming in and how much you’re spending.

That’s the starting point of any budget. But it’s especially helpful when your income changes from month to month. Start tracking your income and expenses as soon as you can to get a better idea of your average earnings and spending.

For example, once you have tracked six months’ worth of income and expenses, you can divide the total by six to figure out your average income and expenses by month.

Many budgeting apps can help you track your finances. Some can connect to your online bank and credit card accounts to automatically import your transactions. You may even be able to include info from earlier months, which you can use to calculate your averages.

If apps aren’t your thing, you can use a spreadsheet or even pen and paper to track your cash flow. Keep in mind, though, that without automated tracking, it can be tough to keep your information up to date.

If you’re deciding how to budget with irregular income, one of the best strategies is the zero-sum budget. This practice helps you put every dollar to work, whether for bills or savings.

“There are several strategies you can use to budget with an irregular income. One of the easiest ones is the zero-sum budget,” says Holly Johnson, a freelance writer and coauthor of a book about getting out of debt. She’s been budgeting with an irregular income for years.   

With a zero-based budget, your income and expenses should even out at the end of the month. The trick is to treat your savings goals as expenses. For example, your “expenses” might include building an emergency fund, saving for a vacation or putting money aside to buy a home.

Johnson says if you’re budgeting on a fluctuating income, you can adopt the zero-sum budget by creating a “salary” for yourself. Consider your average monthly expenses and use that number as your baseline.

For example:

• If your monthly household bills and other necessities add up to $4,000, that’s your salary for the month. 

• During months when you earn more than $4,000, put the extra money into your savings account. 

• During months when you earn less than $4,000, use money from that account to make up the difference. 

“We call this fund the ‘boom and bust’ fund,” Johnson says. “By building up an adequate amount of savings, you’ll create a situation where you can pay yourself the salary you need each month.”

Separating your savings from your daily spending money can be helpful when you’re creating a budget on an irregular income. You may feel like taking money from your savings goals during low-income months. One of the best budgeting tips for fluctuating income is to put your savings in a high-interest-rate savings account so you think twice about using it.

An easy way to take action is to have all your income deposited into one account. You can then share it between separate savings and spending accounts. 

For example, move a set amount on the first of every month to a bill-paying account and a set amount to a spending account. You can use the bill-pay account to cover regular expenses like rent, insurance, car payments, student loans, etc. These bills often stay the same each month. Meanwhile, the spending account can be used for your changing expenses like groceries and gas.

You may also try setting aside money for long-term goals like retirement or a vacation in savings accounts.

If you’re budgeting on an irregular income, you’ll also want to set money aside for taxes. Income and payroll taxes aren’t automatically taken out of your pay, so you have to plan for those expenses yourself. Setting aside money throughout the year can help you stay prepared when tax payments are due.

“The best way to weather low-income periods is to prepare with an emergency fund,” Johnson says. An emergency fund is money you set aside for necessary expenses during an emergency. Think of a medical issue or vehicle repairs, for example. Generally, you’ll want to save enough money to be able to pay for three to six months of your regular expenses. Once you build your fund, you can put extra savings toward other savings goals.

When you’re budgeting with fluctuating income, an emergency fund can give you peace of mind that you’ll be able to cover your bills even if unexpected expenses come up. It can also help you get through longer periods of lower income. Just as important is where you keep your emergency fund. The right savings account offers a high rate to help your balance grow, one like 360 Performance Savings from Capital One.

It can be difficult to budget on an irregular income, especially in the beginning. You might need to cut back on expenses for a few months to start building your savings. It may also take time to try different budgeting methods before finding the one that works best for you.

“Budgeting requires a mindset change regardless of which type of budget you try,” Johnson explains.

Once you have a budget in place, you may feel less stress than many workers with a changing income. A budget can give you more confidence in your financial decisions. It can also help you maintain control over your finances, even when your income changes from month to month.

The goal is to reach a point where you can budget with a changing income without worrying about when your next paycheck will arrive. Basing your budget on your average monthly income can help create a more stable financial plan, especially if your earnings change from month to month. Setting aside extra money during higher-income months can also help pay for expenses when your income slows down.

Want to get on the right track? Follow these budgeting tips for fluctuating income:

• Tracking your average income and expenses can make budgeting with fluctuating income easier. 

• Creating a consistent monthly “salary” and saving extra income during higher-earning periods can help you prepare for slower months. 

• Separate savings and spending accounts can provide more financial stability when income changes. An emergency fund is also a great idea.

Putting these budgeting strategies into practice starts with having the right account to manage your money. Capital One makes it easy to open a 360 Performance Savings account online in about five minutes.