How to build a stable financial plan for your unstable income

Financial planning with a stable 9-to-5 job is straightforward. You get a set number of dollars per paycheck and a steady salary each year. You can plan for specific savings goals and set aside a portion of each paycheck. But for those who have a commission-based pay structure or income that comes in spurts like freelancers or contract workers, it’s a bit more challenging. Here’s how to build a stable financial plan for your unstable income.

Budget Based on Your Low Months

Just because you have an unsteady income doesn’t mean you can forgo creating a financial plan and budget. The trick to budgeting with an unstable income is that you’ll want to base the monthly budget on your lowest income months.

This gives you space to grow your budget in certain areas or set aside extra earnings toward your emergency fund or savings goals. Remember to re-assess your budget as your income fluctuates. That way, if your lowest income months increase on average, you can bump up the budget and send more money toward debt payments or savings each month.

Give Yourself Paychecks if Possible

Sometimes the easiest way to combat unstable income is to use a separate business account and give yourself paychecks regularly. To do this successfully, you’ll need to figure out your average monthly income. Then, make a plan for any excess money that’s leftover at the end of the month. You can use the money towards a particular savings goal or use it to make larger debt payments than you originally planned.

Build a Bigger Emergency Fund

The general advice for an emergency fund is 3-6 months of living expenses. But for those with an unstable income, an emergency fund may be more like 12+ months of living expenses. That’s because there may be times when you need to dip into the emergency fund to cover a bill until a client payment comes through.

Another benefit to an emergency fund is that it grants you more flexibility in your work. Having extra funds set aside for freelancers and those who do contract work means you can choose not to take on a project that doesn’t thrill you just because you desperately need the cash.

Insure Yourself

Insurance policies are built to help create buffers against uncertainty. Paying for a more premium medical insurance plan may seem like a pain each month, but could be invaluable if you’re actually faced with illness.

Life insurance policies are designed to protect your loved ones financially if they lose you and your income. And while term life policies provide a great death benefit for a smaller annual premium, a variable life insurance policy also has the flexibility to pay more on your premiums while you’re financially flush, offering a bit more flexibility as well as growing cash value.

The Bottom Line

Unstable or uncertain income makes financial planning a challenge. But with proper budgeting, regularly paying yourself, building a larger emergency fund, and securing proper insurance, a stable financial plan is in sight. And since unstable income is so, well, unstable, it’s important to regularly re-assess your financial plan and make sure it still makes sense for your larger financial picture.