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How to Smooth Income Variation With Savings

By using a combination of savvy savings strategies and sound budgeting principles, independent and part-time workers can minimize the negative effects of an unpredictable income.

Clock superimposed onto a dollar bill.

If you're a part-time worker, a freelancer, or anyone who isn't a full-time salaried employee with benefits, odds are good you're familiar with income variability. You're also likely familiar with something else -- the sometimes overwhelming financial challenges that accompany it.

Not knowing how much money you'll earn from week to week or month to month can have enormous repercussions on your daily life. It impacts your ability to save money, to pay bills, to pay for health care coverage and to fund a stable retirement.

There's reason for optimism, however. Even if your income is likely to remain variable for the foreseeable future, there are a few smart strategies you can employ to mitigate the effects of this unpredictability.

How To "Smooth" Your Up And Down Income

If your income tends to fluctuate significantly from one month to the next, creating an emergency fund is critically important. It provides you with a much needed safety net should your income fail to meet expectations in any given period.

Saving enough money to cover living expenses for at least six months is a good goal. Along with providing you with much-needed financial cover, an emergency fund also provides you with peace of mind. You can take more risks -- and perhaps do better work -- if you aren't consumed by financial stress and worry.

Additionally, everyone needs a break in order to stay mentally and physically sharp. Independent and part-time workers don't typically have the luxury of paid vacation. The presence of a substantial emergency fund may make the idea of taking a week off much more palatable.

Budgeting is another key concern for those with variable income. If you've got a salary and benefits, it's easier to get away with lax budgeting. If you're facing a shortfall in any given month, however, rigorous budgeting suddenly becomes much more important.

You should also take a realistic inventory of your expenses and project them over a 12-month period. Make a list of what you can trim if your income fails to meet expectations. It's also important to be conservative when making income projections, as it's much easier to find ways to spend a surplus than it is to cover a deficit.

If you're more technically inclined, there's an app that specializes in smoothing income volatility called Even. The app analyzes pay trends to calculate your average earnings, then automatically saves money during weeks when your income exceeds expectations. During weeks when you make less than average, that saved money is tapped to smooth your income.

It's an elegantly simple technological solution to a problem that has bedeviled workers for ages.

The verdict

Income volatility is a serious issue for millions of workers -- and given trends in the global job market, it's only going to become more acute. By using a combination of savvy savings strategies and sound budgeting principles, independent and part-time workers can minimize the negative effects of an unpredictable income.