Budgeting on an Inconsistent Income

Like many freelancers, I tend to have an inconsistent income. Most months my income is fairly stable. Some months it can be double (or half) what it was the previous month.

Most months I don’t know at the start of the month exactly what my income will be over the next four weeks. I definitely can’t say with certainty at the beginning of a year (calendar or tax) what my income will be by the end.

This can make budgeting more challenging and is one of the things that puts people off relying on freelance income. Here are a few of the strategies I’ve tried that might work for you too if you have an inconsistent income.

Assume the Worst

This sounds pessimistic, but it simply means that my core budgeting is done based on a low-earning month rather than a high earning one. If I can still meet my fixed expenses in the months where I’m only doing work for my regular clients, with no extra income hitting my account (which in practice almost never happens) then I can make my budget work.

Prioritize Within Your Budget

On a fixed income you can allocate a set amount to each category and know that amount will be available. On a variable income it’s good to prioritize each category. List all your expenses and ask yourself what is the absolute most important thing in your budget. That is priority number one. The second most important thing is number 2, and so on.

Necessities like food and housing costs come first, of course. As you go down the list you’ll have to make more judgement calls, but that’s OK. Deciding which things on your list are most important (to you) can help you create a more values-based budget that allocates money to the things that most enhance your life.

Have a Buffer Fund

We talk a lot, in personal finance circles, about the importance of an emergency fund, and it’s even more important when your income is inconsistent. What I refer to as a ‘buffer fund’, however, is something different. It’s kept separately from your emergency fund and is where you stash away small amounts of money on your good months to tide you over through the leaner ones.

You don’t have to have an emergency to dip into your buffer fund. It’s there so that if you’ve had a few good months, followed by a bad one, you still have a little cash in hand for your lower priority expenses.

What About Debt and Saving?

Both paying off debt and building up savings are more complicated on an inconsistent income. You should budget for both, just as you would on a fixed income, but be prepared to adjust as you go. You’ve probably heard you should always ‘pay yourself first’ by putting away money for savings and investments before anything else. That’s great advice on a fixed income, but with a more variable income, you may find that it’s sometimes more important to pay for necessities on a very low earning month, than add to investments.

Debt presents similar choices. Paying off debt at a fixed rate each month is a good idea, but maybe not on a month that your income dips to the point you can’t cover other high priority budget areas. Be particularly wary if paying off one lot of debt is pushing you into debt elsewhere, and keep an eye on those interest rates so you can prioritize debt repayments too. If you’re working on credit card debt across more than one card, for example, you’ll want to be prioritising the card with the highest interest rate first.

Tracking Inconsistent Income Is Vital

The ‘feast or famine’ nature of freelancing is just something that most freelancers have to deal with. Some months are better than others. Tracking inconsistent income is important though, because it helps you see whether you’re really having good months and bad months, or whether there’s a pattern emerging. Maybe your good months happen because you pitch more, or your bad months happen when you don’t pay attention to your social media schedule to keep yourself ‘top of mind’ with potential clients.

Tracking your income can help you see when income is consistently going up or down, and indicate it’s time to change something, or build on something you’re already doing. Don’t let inconsistencies in income ruin your personal finance planning. Make dealing with them, and responding to them, part of the plan.

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen