5 Ways to Manage Wide Income Swings

Inconsistent income is fairly common: the money that comes in varies from month to month, sometimes by a lot. Maybe you’re about to get married or divorced. Maybe you’re getting a job, changing jobs, getting a raise, or taking a leave of absence. Maybe you’re self-employed, and your income is subject to fluctuations in the number of hours you work each week or dependent on commissions. Whatever the reason, inconsistent income can have a big impact on your household. Here’s how to manage it in five steps.

Key Takeaways

• First, make a budget.
• Second, try to find a source of steady income.
• Third, get to zero with your budget.
• Fourth, track your spending and adjust it.
• Finally, get an emergency fund together.

Step 1: Create a Budget

The first step in solving an inconsistent income problem is to list your monthly household expenses. For anything that tends to fluctuate, use past invoices or receipts to find an average. Always err on the side of the worst-case scenario if you are not sure. Once you’ve listed everything, add it all up. Now you should know how much you need to cover your costs on a month-to-month basis.

The next step is to compare what you spend with what you make. Add up all your income, and try to get a monthly average. If what you spend is higher than what you earn, you’ll need to make some cuts. Otherwise, you’re on the right track.

Step 2: Create Steady Income

When money comes in, deposit it in a savings account, not your checking account. Each month, transfer exactly enough to cover your budget expenses for the upcoming month. The idea is that your income will fluctuate, but the amount you draw out each month will be the same. You will be paying yourself a set monthly salary, with any extra income remaining in savings, so you can draw on it in lean income months. 

Step 3: Pay Bills and Get to Zero

The concept involved here is known as a zero-sum budget. You will start each month with exactly what you need in your checking account, and you will spend or designate all of it, eventually ending up with very little in your checking account.

Your budget should include both investment and debt repayment. It should also include savings. As almost all money has to leave the checking account each month, big-ticket savings should either go back into the savings account (and be accounted for) or into a separate savings account. 

Step 4: Adjust, Rinse, Repeat

How you track your spending is up to you. You can use a pencil and paper, do-it-yourself spreadsheet, smartphone apps or software such as YNAB (short for “you need a budget”). If you have funds left over, put them somewhere: debt repayment, savings, or investments. It might take a few months before you know exactly what salary to pay yourself. Track and adjust as you go. 

Step 5: Prepare for an Emergency

No matter how well you plan, there will always be unexpected expenses. You can plan to replace car tires when they wear out in six months but not a transmission that breaks down while you’re on vacation.

Important

Most experts suggest having three to six months worth of expenses set aside for emergencies or sudden temporary unemployment.

Alternatively, a home equity line of credit or something similar can provide you with access to emergency cash if needed.

How Many People Can Cover a $400 Expense with Cash?

As of 2023, almost two-thirds (63%) of American adults can cover a $400 expense with cash, the Federal Reserve Board found.

How Many People Are Doing Okay Financially (or Better)?

The Federal Reserve Board found that about three-fourths (72%) of American adults say they are doing at least okay financially, as of 2023.

How Many People Have a Fully-Funded Emergency Fund?

Experts recommend that you save the equivalent of three to six months of expenses in your emergency fund. According to the Federal Reserve Board, about half (54%) of American adults have three months of savings, as of 2023.

The Bottom Line

Managing wide income swings is mostly a matter of smoothing out the financial hills and valleys by filling in the latter with extra income from the former. It will take time (likely a minimum of two to three months) to settle on your “salary.” Even then, you will find yourself tweaking amounts in specific categories on a regular basis. The hard part will be sticking to a budget when you know you have additional funds in savings. Avoid temptation and be inspired by the fact that you have turned the problem of inconsistent income into regular, reliable pay. And you will have done it all on your own.