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How Those with Variable Income Can Save

{% description %}Squirreling away savings when your earnings fluctuate every month can be tough-going, but not impossible. Check out our tips on how to save when you're on inconsistent income.%}

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Save, save save– this is a timeless and fundamental pillar of financial wellness. And when you freelance, ideally you should have more than the recommended three to six months of savings.

The problem is, for those with income that can go up and down—think gig workers who side hustle, freelancers, and self-employed folks—saving for a rainy day can feel like a Herculean feat. But it doesn't have to be. While it can be trickier to save on inconsistent income, it is entirely possible. Let's take a look at some tried-and-true tactics for those with variable income can save those dollars:

Save during higher income months

For those of us who are prone to inevitable flush periods and lulls with our work, make the most of those awesome months when we're raking in more than our usual. To figure out how much you can reasonably put aside, you'll need to know how much you need for basic living expenses and business-related expenses. In turn, it's key to have a budget on variable income.

Let's say your monthly expenses hover around $3,000 a month and you have a great month where you make $6,000. First, you need to set aside some money for taxes—anywhere from 25% to 40% is recommended. (We know, it's a lot. But it's better to err on the side of caution and have more than you need come tax time.)

Whatever is left, commit to putting a portion aside for your savings. You can divvy it up into savings, making extra debt payments, or put it toward your retirement.

Save "extra" money

Besides saving during months where you're raking it in, consider setting aside some cash toward your savings goals when you receive a cash gift for your birthday or a special occasion, or from a tax refund.

By all means, you should still enjoy some of that money and put it toward something fun or for a splurge. The average tax refund in 2021 was $2,827, according to data from the Taxpayer Advocate. As you can see, setting aside, say 10% or 20% of that refund can be still substantial.

Save a percentage of each paycheck

After taxes are factored in, consider saving a percentage of each paycheck. It doesn't have to be a huge amount—maybe start with 2%, or even 5%. There are some apps where you can set up a rule to automatically save a certain percentage for deposits over a particular threshold.

If you're not comfortable with auto-savings, consider an app such as Digit which uses AI-powered technology to determine how much you can afford to save, and does the work for you. That way, you won't have to worry about quibbling over whether you can manage to set a little aside or not.

Save during certain times of year

The beauty of savings is that it can be done on your time and based on circumstances that work for you. If you're feeling nervous about saving a big chunk toward your retirement plan, think outside the box of "I need to save every month." You technically have until April 15 (or whenever the federal tax filing deadline is) to save for HSAs and retirement plans the year prior.

Because you'll be hit with a penalty if you take out money preemptively from these accounts, one way you can approach this is setting up a savings account that serves as a holding pen. Then, stash away funds for an HSA or retirement plan such as a solo 401(k) or IRA. A couple times of year, when it feels "safe" to do, make formal contributions into these plans.

Use basic formulas to figure out how much to save

If you've been managing your money based on variable income for at least several months, look at what your income has been the past year. Then, save a percentage or amount based on that average.

For instance, in the past year you've earned an average of $60,000, and you set aside $15,000, or 25%, toward taxes. That leaves you with $45,000. If your living expenses are $3,250 a month, that leaves you $500 a month towards your savings.

While doing anything financially when you're on inconsistent income has its own set of challenges, coming up with new approaches that are tailored to up-and-down income can help you make progress on your savings goals.

Jackie Lam

Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.