How to Budget With a Variable Income

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It seems like everybody's goal lately is to leave their job and become a freelancer. And that's great! Freelancing gives you flexibility and control -- and, plus, you get to work from home in your yoga pants.

But as someone who has transitioned into that role full-time, there are certain things I do miss about having an employer:

  • 401(k) match
  • Insurance benefits
  • Free coffee
  • Office buddies
  • Income stability

Last year I freelanced, but my monthly income was more or less the same -- and, if not, it was easy to predict. Now that I'm a true freelancer with multiple clients, there are a lot of things that affect my budget -- like how long it takes for a client to pay, for example -- and they're mostly out of my control.

For the most part, my income doesn't vary too much from month to month. When I was in between work at the beginning of the year, however, it was a different story. Either way, here's how I budget with an irregular income.

Zero-sum budgeting
"Zero-sum budgeting" has always been my method of choice. I was using this method before I even knew it had a name. I find it works well with financial goals like saving or getting out of debt.

In her post on this topic, Holly Johnson outlines the steps to create a zero-sum budget. It involves listing all of your expenses, budgeting for them, and then putting the excess to work. Every dollar has a duty. For a monthly amount to budget against, I simply use the lowest amount I've earned in the past six months. I would go for the past 12 months, as J.D. Roth recommended in his own irregular income article, but I was in emergency mode in January, so that amount is pretty low already.

I zero-sum budget according to that amount, and my excess income goes toward my savings goals -- it used to go toward debt goals.

Checking account cushion
I'm too lazy to figure out how much I need to have in my checking account at various times during the month -- after rent, after bills, etc. -- so I simply keep a checking account cushion that's more or less equal to the amount of my monthly living expenses. This helps ensure that, even after rent, I have enough in my checking to cover bills. Once I'm paid, and the amount in my checking exceeds my monthly expenses, I then transfer the excess to savings.

My savings method
I have a few different savings accounts:

  • A high-yield online account (for estimated quarterly taxes and my emergency fund)
  • A traditional IRA (I want to switch to a Roth soon)
  • A SEP-IRA (an extra retirement account for when I max out my traditional IRA)
  • A taxable brokerage account (for a medium-term goal)

Here's what I do.

First, I have a baseline amount -- a "cushion," if you will -- of $5,000 in my online savings. This is to cover my estimated quarterly taxes and any potential emergencies. If an emergency were to arise, I feel confident that this would be enough to get me by until I could:

  1. Find extra work;
  2. Pull money out of that taxable brokerage account; or
  3. Replenish my baseline amount by saving more.

(Note: When I was paying off debt and I didn't have a brokerage account from which to draw, I had much more in my emergency fund. As my finances became more secure, I pared this fund down. Lisa Aberle wrote about this concept in her post on emergency funds.)

I save money in this account for three to four months at a time. So, during that time, I will ideally have more than the baseline amount. I think of it as a holding account, basically. And after I have saved up enough to invest, I take the excess money out, invest it, and leave the $5,000 baseline amount in the savings account.

My savings goals are simply to max out my traditional IRA each year, save a given amount for a medium-term goal, and then save the rest in my SEP-IRA. So when I've hoarded enough in my holding account, I invest the surplus according to where I'm at with those goals.

Estimated taxes
Maybe you're wondering what I do come quarterly tax time when I have to write a big, tear-soaked check to the IRS.

Let's say I have $5,000 in my regular online savings come tax time. First, I calculate my estimated quarterly taxes. I estimate what I expect to earn for the year and then consider what I've already paid. Let's say the quarterly amount I owe is $3,000. I now have $2,000 left in my online savings -- which is below my baseline amount. I simply keep saving until I get back to my safety number of $5,000. Then I go back to my system and save accordingly.

In his post, J.D. recommended creating a "business" account, separate from your personal account:

From this money, pay yourself as if you were an employee. Your monthly salary is whatever you calculated as your monthly budget, your minimum monthly income from the past twelve months. On a set date each month, write yourself a paycheck. Leave the rest of the money in your business account.

This is similar to my savings account. The difference is really just timing. He puts his income in the business account first and then pays himself. I pay myself from my income first and then put the rest in that account -- J.D. uses that account for estimated taxes, too.

Really, my system boils down to just a few things:

  • Save for quarterly taxes in an account that doubles as an emergency fund
  • Use investment accounts for long-term goals, including retirement
  • Maintain a month's worth of expenses in a checking account as a cushion
  • Accumulate money in the savings account until there is enough excess money to invest

Of course, my method might not be for everyone, but so far, it has worked for me. Feel free to share your own variable-income budgeting tips below.

This article was originally published on

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