Saving Strategies for Inconsistent Incomes

For the past 17 years I have worked with musicians and other entertainers who have unpredictable incomes—some months are great, and others are lean. I have helped many of my clients budget and save for retirement even though their income can be inconsistent.

Many of these strategies will also work for entrepreneurs, freelancers, contractors and others whose incomes vary from month to month.

Sticking to a budget

Setting up a budget and sticking to it may be more difficult for people who make different amounts each month, but it is not impossible. It is actually far more important for those with irregular income to follow a budget so they can keep everything on track.

Start by looking at the earnings you brought in during the past 12 or 24 months and calculate your average income. Then multiply by 0.8 (or less)—this is the amount you should try live off each month. The other 20 percent should go into a savings or money market account that you can access easily in the months where your income is less than the average. 

Don’t forget about saving for taxes if they are not deducted for you. Many clients also have a “tax savings account” so when taxes are due, you have the money already held in an account.

When you have a particularly good month, stash away as much of the excess as you can and avoid the temptation of splurging.

Saving for retirement

Saving for retirement and other long-term goals takes a little more discipline. Setting up an automatic savings program is risky because you may not have enough income to cover your payment on a given month. On the other hand, leaving it up to manual contributions may mean you forget to put money in one month or decide to use it for something else despite your best intentions.

Once you have a few years of variable income under your belt, you can determine what percentage of your annual income you would like to put away into a retirement account. When you set up your budget, you probably identified what your lowest-income month looks like.

If you decide to save 10 percent of your annual income for retirement, establish an automatic savings program that puts away 10 percent of whatever your lowest income month is every month. This will be your baseline contribution.

Then make manual contributions on top of your baseline every month. Take that month’s income, subtract the lowest-income month amount, and save 10 percent of the difference.

For example purposes, let’s say your lowest income month is $5,000 and you want to save 10 percent annually for retirement.

In October you earn $5,000, your lowest income for the year, and automatically have $500 diverted to your savings account. In November, you earn $7,000 and again have $500 automatically diverted to your savings account. Split the difference between what you earned in November and what you earn during your lowest-income month ($7,000-$5,000=$2,000) and manually add another $200 to your retirement account (10 percent of $2,000).

Another key to setting up your budget and retirement plan is reviewing annually. You may find your monthly income is trending upward, so you will want to adjust your contributions accordingly.

You can reach Karen Clark at 615-690-4094 or by e-mail at karen.clark@pnfp.com.