Updated: Sep 05, 2023

How to Save When You Have Variable Income

When you've got variable income, such as a freelancer or someone in the service or sales industry, learn how you can still build savings toward retirement.
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When your income isn't the same from month to month, you might find it difficult to stick to a consistent savings strategy.

Maybe you're a freelancer. Maybe you work in an industry with varying hours on a weekly basis. You can't put a fixed number on your monthly income.

Essentially, you've got variable income.

Since you're here looking to improve your financial situation, you're already ahead of the pack. It is possible to accumulate savings even when your income changes frequently.

What you're going to take away:

  • The financial mindset to take
  • How to prioritize your money goals
  • Set up a system that works for you

Pay Yourself First

Here's secret to managing variable income: pay yourself first.

This financial saying is the opposite of “treat yourself.”

Instead, “pay yourself first” means “set aside enough money to cover your expenses and save for the future.”

Because you’re paying yourself first, you need to set that money aside before you buy anything else. People with variable income often plan their budgets several months in advance.

That way, they know what to do with every paycheck when it arrives, whether it’s large or small.

Before you can decide what to do with your paychecks, you have to determine your basic expenses and financial goals. Here’s how to get started.

Know Your Basic Expenses

You've got to focus this:

Knowing your basic expenses is one of the fundamentals of budgeting.

It’s especially important if you have variable income.

You need to know how much money to take out of your big paycheck months to cover your expenses during your small paycheck months.

Start keeping track of your major bills, such as rent, as well as your day-to-day expenses, such as groceries.

  • How much do you usually spend on gas each month?
  • What about clothing?
  • How much money are you putting towards your student loans?

Write these numbers down or use a financial tracking software program such as Mint or YNAB.

You should also track your discretionary or non-essential expenses, such as movie tickets or meals at restaurants.

It’s a good idea to know how much income you spend on discretionary expenses every month. That way, you know what you can cut back on if you want to reduce your expenses or save more money.

You can also work on reducing your basic expenses as well.

Switching to a lower-cost smartphone plan, for example, will save you money every month. That money could go into savings.

Build a Checking Account Buffer

When you have variable income, you’re probably going to have some months when your income doesn’t cover your basic expenses.

Before you start saving for an emergency fund or for other long-term savings goals, start adding money to your checking account.

You’re going to want a full month’s worth of expenses in your checking account to help cover you during low-income months.

That way, you don’t have to overdraw your checking account or max out your credit cards to pay for groceries or other basic expenses.

It’s a smart idea to include a checking account buffer that can cover not only your basic expenses but also your discretionary or non-essential expenses.

You shouldn’t have to skip your friend’s birthday dinner just because you have variable income.

Size of the buffer

Figure out how much money you spend every month on average, and make sure your checking account contains at least that much.

If your checking account balance ever drops below its designated buffer, refilling your buffer should be your first priority after paying bills and other basic expenses.

Any extra cash you earn should go straight into your checking account until your buffer is enough to cover a full month’s worth of expenses.

Put Money Into Your Emergency Fund

Once you have your checking account buffer set up, it’s time to start building your emergency fund.

Your emergency fund should include at least three months of expenses, although many people prefer to save six months of expenses.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

Put this money into a savings account so it can earn interest.

Only spend your emergency fund if you are in a true financial emergency.

Otherwise, try to cover your expenses from your checking account.

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Pay Down Your Debts

If you have debt, you should always make at least the minimum monthly payment. Some people like to throw every extra penny towards their debts.

If you don’t have a checking account buffer or an emergency fund, you need to build those first.

Here’s why:

Let’s say you put every extra penny towards your credit card debt and then have a low-income month.

If you don’t have a checking account buffer, you’re going to have to put your basic expenses on your credit card. You’ll go right back into debt.

Likewise, if you put all your extra money towards your debt and then discover that your car needs a new transmission, you won’t have any extra cash to pay the repairs.

If you had a checking account buffer and an emergency fund, you could handle the extra expense without going into debt or worrying about where the money is coming from.

It’s important to pay off your debt, but don’t do it at the expense of your savings. Once you have your checking account buffer and your emergency fund built up, you can start putting more money towards your debt.

If you are carrying high interest debt, you can reduce your monthly interest charges by refinancing or consolidating your debt. You can even refinance or consolidate student loans.

You can also reduce the interest you are paying on credit card debt.

Try transferring your credit card balance to a balance transfer card that offers an introductory zero-interest rate — but if you go that route, make sure you pay off your balance before the introductory rate ends.

Otherwise, you might get stuck with another high interest rate.

Save for Retirement

Are you setting aside money for retirement every month? If not, you might want to add retirement contributions to your monthly basic expenses.

There are many ways to save for retirement. Some employers offer 401(k) or 403(b) retirement plans.

Talk to your Human Resources representative to learn how to start making contributions. You can also put money into to a traditional IRA or a Roth IRA.

Even if you don’t think you can save a lot for retirement, try to put a little money into your retirement accounts every month.

Even $50 is a good start.

If you have an employer that offers a 401(k) or a 403(b) and matches your retirement contributions, try to contribute enough money to get the employer match. If you are self-employed, putting money into a traditional IRA can reduce your annual tax burden.

Plan for Big Purchases

You should also be setting aside money for major purchases: a vacation, a new car, a new home. If you plan to make a major purchase in the next five years, start saving for it now. Put a little money aside every month and consider it one of your monthly expenses.

Use the Percentage System

Now that you know all of the places your variable income should go, use the percentage system to divide each paycheck.

Here’s an example of how it works:

Let’s say you’re a freelancer who receives a $1,000 paycheck.

First, you set aside 25 percent for taxes. Freelancers don’t get tax taken out of their paychecks, so they have to pay quarterly estimated taxes instead — and 25 percent is a good estimate.

You’re down to $750, so you take a look at your checking account. If your account has fallen below its one-month-of-expenses buffer, use your paycheck to top up the account.

If your checking account has a full buffer, it’s time to put a percentage of your paycheck towards savings.

Try 10 percent — you can always adjust up or down later. Put that 10 percent into your emergency fund.

If you are saving for a goal, like a vacation, put another 5 percent of your paycheck towards that goal. Put 10 percent of your paycheck towards retirement.

This is how paying yourself first works.

By putting that money into savings before you have the chance to spend it on something else, you’ve paid yourself money that you can use to handle expenses during an emergency — or go on vacation.

After you’ve paid yourself (and taxes), you should have 50 percent of your paycheck left over. Since you began with $1,000, you now have $500.

Leave that $500 in your checking account.

At this point, you should check in with your debts.

  • Do you have enough money in your checking account to pay any outstanding monthly expenses and cover the minimum payments on your debt?
  • Will you be able to make a larger payment this month?

If you want to make larger debt payments and you don’t have enough money left over, reduce the percentages of income you put towards your emergency fund, your short-term goals, and retirement.

The Bottom Line

When you have variable income, your first goal should be to cover your basic expenses — both now and one month into the future.

Then, use the percentage system to divide the rest of your money.

That way, you can pay off your debt, build your emergency fund, save for retirement, and achieve your financial goals.