How to Budget With Irregular Income

Quick Answer

You can create a budget with an irregular income by: Adding up your fixed and variable expenses, calculating your average monthly income, allocating where your money goes and building an emergency fund.

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As an independent contractor, freelancer or gig worker, you enjoy the freedom to choose when and where you want to work. But your income may not be as predictable as that of an employee with a regular paycheck. When your income varies from month to month, setting a budget is critical to meeting your financial obligations.

You can create a budget with an irregular income by adding up your fixed expenses, estimating your average monthly income and allocating where your money goes.

1. Add Up Your Fixed Expenses

Start by determining your fixed monthly costs. Fixed expenses are those that vary little, if at all, from month to month. These might include:

  • Rent or mortgage payments
  • Utilities such as gas, electricity and water
  • Internet service
  • Car payments, gas and auto insurance
  • Groceries
  • Student loan payments
  • Credit card payments
  • Personal loan payments

Add up your fixed expenses by reviewing your bank and credit card statements from the past three to six months. Some fixed expenses may vary slightly from month to month. For instance, you might have a higher electric bill in the summer when you use your air conditioning. In this case, add up the expense and determine a monthly average.

Don't forget one-time or annual expenses, such as property taxes, homeowners insurance premiums, home maintenance or repairs, car registration, and holiday or birthday gifts. Add up these expenses and divide the total by 12 to estimate how much you should put aside monthly to pay for them.

Create categories for your fixed expenses that make sense to you. For example, your categories could include housing, utilities, subscriptions and car expenses. Listing the dates when recurring expenses are due helps you manage your income so you can pay your bills on time.

2. Estimate Your Variable Expenses

Unlike fixed expenses, variable expenses can change drastically from month to month. In general, variable expenses are discretionary purchases—nice to have, but not essential. For example, groceries are essential, while restaurant meals are discretionary. Variable discretionary expenses can include:

  • Clothing
  • Entertainment, such as concert or movie tickets
  • Travel
  • Restaurant meals
  • Personal grooming, such as spa treatments or haircuts
  • Gym memberships
  • Subscriptions to cable TV, streaming services or magazines

3. Calculate Your Average Income

Next, get a general idea of how much money you make every month. To do this, add up your gross earnings from at least the past three to six months, and divide the total by the number of months to arrive at an average monthly income. For example, if you earned $3,000 one month, $2,100 the next and $2,800 the third, your total is $7,900 and your monthly average gross income is $2,633.

If you have records for a year's worth of income, even better. Reviewing your income from an entire year can reveal other earning trends that may affect your budgeting.

For instance, a rideshare driver's income might be higher in the spring and summer when people tend to travel, and lower in the winter months when bad weather keeps people indoors. An hourly worker at a ski resort may work overtime during the winter and fewer or no hours in the summer. If you notice big swings in your income, you can plan accordingly and either try to earn more, or budget to spend less.

Once you've estimated your gross income, you'll need to subtract taxes to arrive at your net income. Unlike employees who have income tax withheld from their paychecks, independent contractors must pay both self-employment taxes and regular income taxes out of their paychecks. Many independent contractors make quarterly estimated tax payments during the year and file annual tax returns in April. The amount you owe will vary depending on your income that year, but as a rule of thumb, setting aside 25% to 30% of every paycheck for taxes should give you enough to pay both your estimated taxes and your annual tax bill.

4. Allocate Your Paychecks

Now that you have an idea of your income and expenses, allocate where your income goes by making a budget. There are several ways to do this, but zero-based budgeting works well for many independent contractors.

With a zero-based budget, every dollar you earn is assigned to a specific expense so that your income and expenses "zero out." Be sure to include all the categories you created when assessing fixed and variable expenses, including one-time expenses and money set aside for savings.

To make zero-based budgeting easier, consider these tips:

  • Use a money-tracking app to keep track of your cash. Knowing when money goes in and out can help you make sure you don't accidentally spend the rent money at a restaurant. These apps connect to your bank accounts, giving you a real-time snapshot of your income and outgo.
  • Use multiple bank accounts to help organize your finances. You can set up two checking accounts—one for fixed expenses and one for discretionary spending—and a linked savings account where you stash your emergency fund.
  • Open multiple savings accounts. You could have one for an emergency fund, one for your cash cushion, one for taxes—and one checking account linked to the savings accounts. You deposit your paycheck in your checking account and transfer the appropriate amount into your savings accounts each month.

When using multiple bank accounts, be sure you understand any fees and restrictions the bank charges. For example, many banks limit the number of transfers you can make from your savings account each month and charge fees if you exceed that amount. There may also be fees for falling below a minimum account balance. Online-only banks, which usually charge lower fees than traditional banks, could be an option if you don't need access to a physical bank branch.

5. Build an Emergency Fund

As an independent contractor, you may not always qualify for unemployment benefits if your work dries up or your biggest client goes out of business. You must be prepared to provide your own safety net, which is why a solid emergency fund is essential. Aim to build an emergency fund that can cover three to six months' worth of essential expenses. If your income is extremely irregular, or you're in an industry with frequent economic ups and downs, you may want an emergency fund sufficient for 12 months of expenses.

Keep your emergency fund in a savings account such as a high-yield account and use it only for true emergencies, like a car breakdown or a major medical bill. Occasionally, if a client pays you late, you may need to draw from your emergency fund to cover your normal expenses. If so, immediately replenish the funds in your emergency account as soon as you get paid. Automating monthly or weekly transfers from your checking to your savings account can also help build your emergency fund without you having to think about it.

6. Adjust Your Budget as You Go

Your first attempt at budgeting with irregular income will undoubtedly need some fine-tuning. At the end of each month, review whether your budget met your financial needs. Did you overspend? Did you save enough? Tracking your expenses will help you figure out where to adjust your budget. You may decide you need to reduce expenses or earn more money. Gradually, you'll arrive at a budget that works for you.

Don't Let Irregular Income Hurt Your Credit

When you have an irregular income, following a budget can help you pay your bills on time and avoid overreliance on credit cards. Missed or late payments or high credit card balances can lower your credit score, making it harder to get credit and loans in the future. Experian's free credit monitoring service can help you maintain your credit score by alerting you to any changes and suggesting ways to improve your credit score. As an independent contractor, you're captain of your own ship. An effective budget can help ensure smooth sailing.

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