10 Practical Tips for Managing a Variable Income

Not knowing how much money you’ll make in a given month can really make you feel anxious. But with the right systems in place, you will understand precisely where your money should go and how to plan for the future when you are managing a variable income.

Variable income is when the amount fluctuates every week. You could have an extremely high earning month and then a low income the following month. This is most often associated with self-employed individuals, those working in sales and off commission, or hourly wages where hours fluctuate every week. It can also include tips and investments.

A variable income can be difficult to plan around. Some months you might be able to live like a king, but other months you might not even know if you can fill your gas tank. But with over 50 million freelancers in the U.S., you aren’t alone on the rollercoaster of a fluctuating income.

Below I will share some of the best strategies you can follow when relying heavily on variable income:

Start With A Financial Checkup

It’s important to assess your finances. This means you need to know how much money you have in your checking and savings accounts, what you owe in taxes, and what you spend each month. First things first, gather all financial information and write everything down. Determine your monthly income over the past year and identify your best and worst months.

Secondly, set financial goals for the next 12 months. Consider any changes that may affect your income and ability to work and take those into account

Track Your Income and Budget

If you’re on a variable income, the key is to keep track of all your income, so that you can figure out how much you’re earning on average each month. From there, you can develop a comprehensive budget that accounts for all your expenses, including your own salary if you are an entrepreneur. If you have months where you earn more than the average, set aside the overage to help smooth out slow periods.

Consider opening bank accounts for dedicated purposes such as business, personal, emergencies, and taxes.

Set up an Emergency Saving Funds

Variable income is a reality for sole proprietors, freelancers, and salespeople, especially in the startup phase when developing contacts, landing contracts, and creating a steady stream of business is your focus

To help get through slow times, be consistent about setting aside funds in an emergency account. One rule of thumb is to have four to six months’ worth of living expenses set aside.

Pay Attention to Your Taxes

One of the best things you can do is to set aside money for taxes whenever you get paid. The exact amount depends on the tax bracket you’re in. Small business owners may also need to pay sales tax, employment tax, excise taxes, and more. 

If you’re a freelancer, set aside a portion of your earnings for taxes, and use Form 1040-ES to estimate what you owe to the IRS. 

Consider setting up a savings account for tax payments. Link it to the checking account where you deposit your earnings. Transfer money from your checking account to your savings account every month or each time you get paid by a client.  This will help you in your journey of managing a variable income. 

Secure Your Health Insurance

Being an entrepreneur or freelancer means you are likely responsible for your own health care plan. Federal programs are available for those who qualify – such as Medicare or Medicaid and healthcare.gov serves as a marketplace for private plans, but be sure to confirm open enrollment dates. Depending on your situation, you may be able to qualify for some subsidies.

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Don’t Forget About Retirement

Retirement may seem a long way off, but now is the time to set aside funds to give them time to grow. Even if you don’t have a traditional 401(k) through an employer. Experts recommend setting aside 15% of your income2 toward retirement, if possible. Keep your money in a tax-advantaged retirement account such as an IRA. If you want to save more than the annual IRS cap for tax-advantaged IRAs, consider these other tax-advantaged retirement plans for self-employed people.3

RELATED: Should You Borrow From Retirement to Buy a Home?

Cut Down Discretionary Spending

Non-essential expenses, or discretionary spending, can add up in the long run. Seek ways to cut down discretionary spending at least for a while. You can start by canceling recurring app purchases and magazine subscriptions. Get a water filter jug so you can stop paying for bottled water. Make your own snacks instead of buying potato chips, trail mixes, and other treats. Think twice before buying an extra pair of shoes or a new jacket.

Focus On Growing Your Income 

Making savings and cutting back on expenses can help you avoid financial mishaps, but it’s just a temporary solution. While it’s possible to live comfortably on a fluctuating income, you must also focus on bringing in more money. This will allow you to keep up with your expenses and afford the things you want. If you’re already freelancing, seek new ways to monetize your skills. 

If, say, you’re a content writer, consider publishing an eBook or online courses to generate passive income. Depending on your expertise, you could also offer consulting services to aspiring writers and bloggers. Another option is to increase your rates and sell retainer packages. 

Create a Financial Plan

Now that you know how to begin managing a variable income, it’s time to make a plan. Think long-term rather than focusing on your immediate needs. Set small financial goals in the first few months and aim for more as you get better at managing your money. 

The key to making it work is to ditch the all-or-nothing mindset. When you’re a freelancer or startup founder, it’s perfectly normal to have a variable income. Be realistic about what you can afford and take small steps toward a better future.

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Pay Yourself

Pay yourself a salary drawn from your previous month’s income and based on your total expenses, and deposit the amount into your day-to-day spending checking account. You can also deposit the money into the account you use with a credit card. It’s best to set a salary equal to your lowest monthly spend and later adjust your discretionary budget accordingly.

What are some ways you can start managing a variable income?