How to save money despite unsteady paychecks — and grow richer


Landing your dream job can be tough in a so-called gig economy where freelance work is common and companies increasingly turn to contingent workers or independent contractors. Maybe you don't have a steady paycheck because you're pursuing your dream to work for yourself. Or maybe you simply can't find steady work.

Luckily, this doesn't mean you have to give up on financial security. If you're smart about money and make a plan, you can live comfortably — and even save money — on irregular income. Here's how.

Know how much you need to spend

When you have a nice steady paycheck coming in, you can divide up your income for fixed expenses like rent, saving for retirement, and variable expenses like grocery bills and fun stuff. 

If you don't have a fixed income, you can't plan your spending that way since you don't know how much cash you'll have coming in. Instead, your starting point for financial planning should involve figuring out your bare-bones budget, or your baseline.

"Someone with an irregular income needs a spending plan more than anyone else does because of how unpredictable their income is," Barbara O'Neill, a professor for Rutgers Cooperative Extension, told Mic in a phone interview.

Indeed, "those with unpredictable incomes must work 'backward' — starting with the amount of money you'll spend to figure out how much you need. If your income is unstable, then it is your expenditures that must be stable, predictable and repeatable," writes Forbes

"You need to track your expenses for a month or two to get a really good handle on what has to be paid, including your fixed expenses and also some of your recent trends on variable spending for things like entertainment, food, clothing and other things that aren't set in stone but that people tend to buy a lot,"  advised O'Neill. 

When you list your essential and discretionary monthly expenses, don't forget to include saving for quarterly tax payments required for the self-employed.

Count saving for retirement as an essential expense.  Ideally, you'd save at least 15% of your annual income for retirement. Go by your previous year's earnings to estimate income when deciding how much to save. 

Another approach is to base retirement savings on the amount of income you actually want to have during retirement. This calculator can help you figure out what to save each month to achieve that goal. 

Dole out your earnings in a strategic way

Once you know your spending, you know how much you have to earn to pay the bills. The next step is to figure out exactly what to do with the income you're earning. There are a few options.  

One approach is to transfer only the amount of money you need each month into an account that you spend from over the course of that month.  

"Once you’ve created your bare-bones budget and added up your unnecessary expenses, you’ll know exactly how much money you need to make it through the month without dipping into savings. So, on the first of the next month that comes along, deposit that amount of money into your regular checking account – and nothing else," advises The Simple Dollar.

The Simple Dollar refers to this approach as "living on last month's income." This is a good approach once you're established but can be really hard if you're just starting out since you may not have enough money to deposit into your account to live on. 

If you're just starting out, try a different tactic. 

"When you receive a paycheck, take the amount and spread it out to the items on your budget, starting at the top and working down. Your check may not cover everything listed. That’s okay. Use it to pay as much as you can. Then, when your next check comes in, pick up where the last check left off. If you end up with extra money left over to budget, then you can save more, spend more or pay more on your debts," recommends Dave Ramsey

Another option is to pay yourself a regular "salary" out of the income you earn that is enough to cover essential expenses and save the rest.

"I have an annual salary that I pay biweekly," Joshua Schall, fitness and sports business strategy consultant in Austin, Texas, told Credit Karma

Set aside extra cash to create a reserve fund during flush times

Once you've paid yourself enough income to cover essentials and a little bit of fun money, if you can, be strategic about what you do with the rest of your cash. The best option: Set up a reserve fund. 

"Take some money each month and set it aside in a money market fund or something you can access quickly. Put that money aside for the months that are lean," advises O'Neill.

"Even if you have a huge payday one month, live like it's any other month and save the difference," Financial Planner and Registered Investment Adviser Jaycob Arbogast told Credit Karma

To build your reserve fund "put money into the fund at the same time you pay your other fixed expenses. This is called ‘paying yourself first’ and should be a priority especially in the months when more than the minimum income is received. You will need to cover a minimum of four weeks expenses from this fund. More ideally, work toward building a fund that can support three to six months of living expenses," advises Colorado State University Extension

If you have a bad month, you can draw from the reserve fund to pay your required bills. 

Build an emergency fund

In addition to your reserve fund, it is also a good idea to save for unexpected emergencies. But it's important not to confuse a reserve fund and an emergency fund.

"An emergency fund is if you lose your job completely, your car blows a gasket or some other serious situation. ... The reserve fund is just for those slow months when your income dips below what you expected," Arbogast told Credit Karma.

Over time, it's ideal to build your emergency fund up to cover six months of living expenses. And yes, this is in addition to the six months of expenses you have in your reserve fund. Having enough saved to pay for 12 months of expenses will "account for the additional income volatility compared to a traditional 9-to-5," says Arbogast. 

You don't have to save all this money at once. Just commit to putting aside as much as you can in your reserve and emergency funds until you've saved the recommended amount. 

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