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A Guide on How to Budget on A Variable Income

By Erica Gellerman
August 29, 2019

There are a lot of perks that come with freelancing, but a stable, regular paycheck isn’t one of them. 

During my first year as a freelancer, I dealt with an inconsistent income roller-coaster: One month I’d stress about late client payments (and making rent), while the next month I’d find myself flush with cash. 

Indeed, when you don’t know how much you’ll make or when you’ll get paid in a given month, it’s difficult to get ahead financially. Currently, 20% of the workforce is freelance and that number is projected to rise to 50% within the next decade. And freelancers aren’t the only ones dealing with an inconsistent income. If you’re paid on commission or earn the lion’s share of your income on tips, you may be dealing with this roller-coaster as well.  

For me, I had to implement a budgeting system that helped me pay bills and save money for my financial goals. I found a system that works for me, and it can work for you, too. Read on to learn more about my tried-and-true budgeting system for an inconsistent income. 

How this budgeting system works — an overview

While your income may be irregular, most of your bills are not. Plus, one month you may live large because a client finally paid you while another month you can barely cover rent because things have been slow. 

To break this feast or famine cycle I nailed one goal: I pay myself first with a steady, consistent paycheck. Regardless of how much I earn each month, I still get paid the same amount. 

So, let’s say you’ve decided that your monthly paycheck needs to be $5,000. One month has been stellar, and after setting aside money for taxes, you’ve earned $7,500. Rather than spending that $7,500, you pay yourself $5,000. 

The next month has been a little rough and after taxes, you’ve only earned $3,500. You can still pay yourself first with a regular paycheck. See how that works?

While it may be a bummer to not spend a little extra during months when you earn a lot, you’ll be thankful that you didn’t blow your cash when a slow month rolls around. 

Steps to implement this system

The pay yourself first concept is pretty straight-forward. But, with any budgeting system, there are a few key steps you’ll want to take to implement this. 

Step 1: Calculate your budget

The first step is to figure out what your monthly paycheck will be. If you don’t have a budget already, start by listing all of your necessities. These are the things that you absolutely must be able to pay for each month, regardless of how much or how little you make. For example: 

  • How much do you spend on things like housing, transportation, utilities, groceries, and health insurance premiums? 
  • How much do you transfer into savings each month for retirement and other goals?
  • What are your debt payments? 

Next, you’ll add your discretionary spending to your budget. This includes things like eating out, shopping, subscription services, and any extra travel. Discretionary spending is nice but you can also cut it out when things get really lean. 

Not sure what you spend? Take some time to look back through your past few months of credit card and bank statements to get a good estimate. 

Once you have everything listed, add it all together. This will tell give you a ballpark idea of your monthly budget and monthly paycheck amount. 

Step 2: Set up separate bank accounts

To keep this system organized, you’ll want to have a few separate bank accounts set up, including accounts for:

  • Work income (or business) 
  • Personal spending 
  • Savings 

It’s a good idea to deposit your work income into a checking account that is only used for your work expenses (no personal spending). If you’re self-employed you might want to consider using a business checking account. 

Each month your “paycheck” will be transferred from your work checking account to your personal checking account. You’ll pay all of your bills and do all of your personal spending with the money in this personal account. 

You’ll also want to have a separate savings account that you can pull from during your down months. Dave Ramsey calls this savings account a “hill and valley fund”. When you have an exceptionally good month, you can transfer money from your work checking account to this savings account. And during an exceptionally bad month, you can transfer money from this savings account to cover your full paycheck. 

Step 3: Adjust as needed

Just like with any other budget, you can make changes periodically and check to see whether this system is working. If you find that you haven’t given yourself enough of a paycheck to comfortably live, go back to step 1 and recalculate your budget. If you find yourself constantly needing to dip into your savings account to give yourself a paycheck and that account balance is getting dangerously low, you may need to cut back on some of your expenses or earn more money. 

Set yourself up for success

If you have an inconsistent income, don’t fret. You can still enjoy the benefits of flexible earnings with a budget that works. 

While it can take some time to set up this system and get used to paying yourself a consistent income, you’ll eventually breathe a little easier each month. Besides, it’ll be nice not to worry about paying your bills when things get a little slow. Are you ready to give it a try?


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