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How to budget when your income changes

4 min read

A simple way to plan when you are paid different amounts each month.

Freelancers, seasonal workers and people paid by commission often face the same problem: a budget needs a number to plan with, and your income keeps changing. This guide shows one approach from a US bank's education page, plus some suggestions of our own.

Step 1: Find your averages

Add up your income and your spending for the last six months, then divide each by six. The source for this approach, a US bank's education page, suggests this as the starting point. If you have less than six months of records, use what you have. A rough average is better than none.

Step 2: Give yourself a steady "salary"

Instead of treating every payment as spending money, pay yourself a regular, fixed amount from your income, based on your average. The idea is a zero-sum budget: every unit of that amount is given a job, such as rent, food, bills or savings.

Step 3: Save in good months, draw in lean months

In months when you earn more than your "salary", keep the extra in savings. In months when you earn less, take the difference from those savings. Your steady amount stays the same either way.

Step 4: Keep saving and spending money apart

The source suggests using separate accounts for saving and spending, so that your buffer is not mixed with everyday money.

Step 5: Set money aside for taxes

Some income arrives without tax already taken off. If that is true for you, the source suggests setting some aside. How much, and when it is due, depends on your country and your situation, so check with your local tax authority or a qualified adviser. We do not give tax rules.

Step 6: Build an emergency fund

The same source says to aim for three to six months of regular expenses. That is a big goal, so see our guide on starting an emergency fund for smaller first steps.

An example

These are made-up amounts. Over six months, Alex's income was 1,800, 2,400, 900, 2,100, 1,500 and 2,700. The total is 11,400, so the average is 1,900. Alex sets a "salary" of 1,900 a month.

• In a month with 2,700 coming in, Alex pays the 1,900 and puts the extra 800 into savings.
• In a month with 900 coming in, Alex pays the 1,900 by taking 1,000 from savings.

Because the six months above average and below average roughly balance, the pattern can work. If income stays below your average for a long time, the buffer will run down, and the average needs to be recalculated.

Our suggestions for the lean months

These are our ideas, not from the source:

• List your essential bills first, so you know which payments come before everything else.
• Review the average every few months, using your newest records.
• Some people set the "salary" a little below their average to build a buffer. This is only an idea.

Limits

In our view, this approach suits income that is uneven but broadly steady over a year. It cannot fix an income that is too low. If you are behind on bills, an independent, free debt or money advice service in your country may be able to help.

We did not find an official European page on this topic. The source above is a US bank's general education page, and you should check any rules about self-employment, benefits or taxes where you live.

The source page also promotes the bank's own savings account. We do not recommend any bank or product.