Automating Savings on an Irregular Income

One of the tenets of personal finance is to pay yourself first. And one of the most sure-fire ways to make sure you do that is to automate your savings: setup your checking account to make an automatic deposit to your saving accounts.

Automation has been incredibly effective for me. I have targeted sub-accounts for property taxes, auto repairs, house savings, and more — a tactic I learned about here. The first year my husband and I had to pay property taxes, however, the billing statement felt like it came out of nowhere — was it really due already? Luckily we had the cash, thanks in part to a very generous wedding gift sent the month before, but that was pure luck. If not for that, we would have had to suspend our debt repayment and possibly dip into our tiny (but growing) emergency fund. When we paid property taxes the next year (and every year since), all I had to do was transfer the money from savings into our checking account, then pay the bill. Much less stressful!

Automation on uncertain income
One of the downsides of being self-employed, however, is that my income is irregular. Irregular income is a reality for most freelancers, as well as people who are paid on commission or on tips, to name a few.

We still have the important expenses — like home insurance, taxes, and retirement contributions — on automation, but a large chunk of our income is being directed toward saving to build our house. Since I'm never sure exactly how much I'll make each month, I've been hesitant to designate a set amount to be automatically withdrawn for that particular savings account. What if a client was late sending payment? And what if that automatic transfer slipped my mind and I forgot to cancel it for the month?

Instead, I've waited until bills were paid and automated withdraws cleared, then transferred the remainder (minus some padding that I leave in checking) to our house savings account.

This has worked out okay, but sometimes I forget to make the transfer, and then I'm stuck trying to sort through how much was left at the end of last month, along with whatever expenses we've had since then. Also, I like having a system — with automated payments, I can predict how much will be in our account in six months or a year. This is particularly helpful for our house savings account, since we're paying cash to build our home. Finally, there's no temptation to spend the money. We're pretty good about that, but with automation, it's becomes a certainty.

Found savings
This month our income and expenses had some big changes. In order from smallest to largest, here's what has changed:

  • Yoga membership. I was paying $70 per month for unlimited yoga classes, but cancelled my membership because there were no longer enough classes I liked on the schedule. For now, I'm paying about $44 a month for a per-class pass, and my fellow yoga practitioners and I have set up group practices (free). I also revived my home practice, but cancelled a $15-per-month subscription to online yoga classes. This is a total savings of $41 per month.
  • Fuel expenses. I no longer drive to yoga class every day. When I do drive, I make a list of all errands I can run while I'm out to prevent additional trips to the store. And once a week my husband works right around the corner from my yoga studio, so I carpool with him, go to class, then work from a library or cafe until he's done. After doing this for almost a month, I estimate I'll save at least $45, which I think is a conservative figure.
  • Student loans. My husband's student loans came due in December, meaning a new $202 payment each month.
  • Paid off land. Five years ago we bought an unimproved 2.5 acres where we're now building our home. We elected for a 5-year loan to force ourselves to pay it off quickly, and guess what? As of January 15, we own the land free and clear! This frees up $710 each month.

With these savings and the new expense, we now have $594 of “found” money. This money used to be tied up in other expenses, and even after I quit my day job a year-and-a-half ago, we never had a problem paying them.

I realized this is a perfect time to automate our house savings. Instead of making the transfer of the extra $600 each month (may as well round up, right?), I set up an automatic transfer of $600 from our checking account to our savings. Of course I'll still have to transfer anything above that amount, but for now, the $600 inches me closer to automation.

Additional income, snowballed
A little excited about the idea of automating our house savings (I'm kinda nerdy like that), I started to think about other ways to automate more of our savings.

Right now I'm talking with a client about working together on a more regular basis. This client has always paid on time, and I'd be writing for them biweekly. This new income source could be funneled into our automated house savings, since it will be predictable (well, as predictable as an income source or job can be). I can do the same thing with any future, regular work.

I held off on automating our house savings because of my irregular income, but even people with a fluctuating salary can automate a good portion of their savings. Start with found money from paying off debt or cancelling a subscription you haven't used in months, then increase the amount even more if you have extra, regular income (above what you need to pay the bills). This might be income from a second job, a side business, or overtime you work regularly, as examples.

Finally, remember that even small amounts will start to add up. That's something I dismiss sometimes because a few dollars doesn't seem like enough to make a difference. But if we downgrade our Netflix membership, something I've been considering based on our rental history, I plan to add the $8 savings to the automatic savings deposit — I guess I'm feeling extra motivated!

If you have an irregular income, what is your savings system? Do you automate your savings, or do you have a hybrid system like mine?

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Long
Long
8 years ago

Right now I am focusing on paying down my wife’s student loans with all we have. Once that is done, I plan on automating savings to our high-yield online savings to beef up our emergency fund.

I hope to one day be able to save to build a house like you. I have a decent plot of land that my current house sits on, but I would love nothing more than to re-build it to my specifications. It really does depend on other circumstances though, because it’s a want more than a need.

Milly
Milly
8 years ago

When I was saving to become FI, all of my take-home pay went into a savings account and we just pulled out money for big expenses as we needed it. My husband’s income went for our regular expenses. In your case, it might work to put all your income into savings, and pull out the amount you need for your regular expenses monthly. It changes your mentality from saving what you can spare to spending only what you need and saving everything else. Surprisingly effective.

janet
janet
8 years ago

I was dissapointed with this post. I am a freelancer too and was looking for some good ideas to help relieve the frustration of an uneven income. Instead, most of this post was generic information about how the poster saved money by cutting back on yoga etc. It had nothing to do with the posts title. I would still like to read something that would help take the financial stress of not knowing how much income I have from month to month.
thanks

Brent Pittman
Brent Pittman
8 years ago
Reply to  janet

Not sure if you are still following this thread, but I wrote a few tips that might help and there are a good number of ideas in posts below.

http://www.ontargetcoach.com/a-budget-for-artists-and-freelancers-budgeting-with-an-irregular-income/

EconomicallyHumble.com
EconomicallyHumble.com
8 years ago

Since I’m a student I make very little, so, when I make extra, say from selling my used books, or house and pet sitting, it goes to savings. I also try to save as much of my scholarships and fellowships as possible in an ING account and instead live on what my partner makes. We can’t always do that, but working to get there helps. Others things we do… I sold my car so we dont pay for gas and insurance on it, I bought a beater bike and fixed it at the coop, ditched cable and use a DropBox,… Read more »

Leigh
Leigh
8 years ago

I am absolutely with you on the idea of snowballing additional income!

I make a list of my savings priorities at the beginning of the year and then I throw about the same amount at each priority until it’s finished. I love being able to throw additional income at a savings goal and watch the amount remaining to meet the goal go down even faster!

MC
MC
8 years ago

We’re about to pay off our second mortgage, which will free-up about $284, which we’ll have paid off 22 years early.

Then we have just a few months left on my wife’s student loans ~$65.

I think we’ll be reserving those dollars for our next car, in savings for now, then a modest car payment if needed. Really excited about reducing the monthly expenses!

Mike

BV
BV
8 years ago

I hope this isn’t seen as rude, but I think it’s pretty obvious where you can find money, given that your income is not stable. I assume that you don’t have children, OR have any magazine subscriptions, sky, netflix or anything else like that. To state it plainly: why on earth would you pay anything towards yoga classes, let alone $70?! (even at the start.) General Point: often, when people talk about personal finance issues they are either not clear about what is their “vice” OR they refuse to look at the obvious. It may be the case that the… Read more »

Michelle
Michelle
8 years ago

Great article! I’m also a freelancer with similar issues. I’ve done it a slightly different way – I save by the client. Clients with regular monthly charges and regular payments make up my monthly budget for spending. Clients who are more infrequent go into savings.

Lisa C
Lisa C
8 years ago

I never thought of doing it the way Milly suggested, but I think that would be an excellent way to focus on savings. When I got married, it wasn’t easy to automate savings. I set up a spreadsheet with our average monthly expenses and copied that “template” twelve times to have a year’s expenses planned out. The entries served as sub accounts, because if we didn’t spend the full amount in a category one month, it got added to that category for the next month. I used the spreadsheet to keep track of what part of the money in the… Read more »

Twist
Twist
8 years ago

I’ve always just gone with a set percentage of whatever I make

El Nerdo
El Nerdo
8 years ago

We have a fixed expense budget, whatever is extra gets saved, and in lean times it gets consumed. Tehre is no need for automation since it’s only 1 transaction into 1 account. It’s a buffer fund more than an emergency fund, but we try not to count on it. Eventually it will get fatter to where it can be moved elsewhere (not cash).

It’s pretty primitive, I know, but you should have seen me a year ago, scrambling to make it.

honeybee
honeybee
8 years ago

Whooooa. What is this online yoga thingy of which you speak? Why did you drop it? Did you like it or dislike it? (I guess you found it not worth $15, but was it really lame or just not something you were using much?)

BB
BB
8 years ago
Reply to  honeybee

I too want to know. Drop-in classes near me run about $15 per; online sounds like a bargain.

doug_eike
doug_eike
8 years ago

Some people have to trick themselves into saving, and I think that’s fine. Whatever it takes to get the job done is OK. Automatically skimming the savings off the top and living on the rest or spending what you must and saving the remainder are both fine methods.

Personally, I prefer to spend as little as possible at every turn and save what’s left. One important truth is that most of us can live on far less than we think. Thanks for the insights!

CDO
CDO
8 years ago

I’ve been a freelance writer for 20 years, and have worked out a system to deal with sporadic checks. It has always worked pretty well, but you probably need some cushion to make it work in the beginning. Every check that comes in, large or small, gets divvied up: 65% living expenses, 20% taxes, 15% savings. I allocate all of it in quicken, with each chunk being put aside in an end-of-the-year “check.” Then I dole out the 65% chunk in a regular monthly amount – my “paycheck.” I don’t touch the tax $ until needed for quarterly tax payments.… Read more »

Brent Pittman
Brent Pittman
8 years ago
Reply to  CDO

CDO,

This looks like one of the best systems I’ve seen for an irregular income. Did you come up with it yourself or learn from another? I’d like to learn more from you about this if you have time. Please let me know how to contact you.

Brent Pittman
Brent Pittman
8 years ago
Reply to  CDO

CDO,
Please us my contact page:
http://www.ontargetcoach.com/contact-me-6/

Marianne
Marianne
8 years ago

We do get regular paychecks but the amounts fluctuate quite a bit as our line of work is fairly seasonal. All of our money goes in one big pot and I keep ledgers to keep track of how it’s all allocated. I budget according to our lowest possible income and save anything we make over that. This means that we save a lot during the busy season and not so much during the slow season/ if we take time off etc. I tried to do a piechart of our budget in a recent blogpost and realized that it was incredibly… Read more »

Michelle @ Making Sense of Cents
Michelle @ Making Sense of Cents
8 years ago

We don’t pay ourselves first, but plan on starting soon.

SJ
SJ
8 years ago

My business puts out an EXTREMELY irregular income (some years income can be 5x others) and my wife is stay at home, so I’ve gotten to a point my income and expenses are so unrelated I don’t even think of something as “savings” on any regular basis. My income goes into a money market from which a monthly “stipend” is paid. I keep 2 years worth of expenses in that MM and anything over that goes to investments. We have worked out a SOL that seems reasonably comfortable to us to determine that stipend. Given its quite a bit less… Read more »

Laura+Vanderkam
Laura+Vanderkam
8 years ago

The fascinating thing about this post (and a mindset I’m sure many of us fall into) is that the author had thought she couldn’t automate savings, but she had several automatic monthly payments. Yes, of course you need somewhere to live, to pay utilities, etc. The trick is to view savings as equally non-negotiable. A few ideas… in 2-income couples if one party has a stable income, live off that, and save what comes in from the person with fluctuating income. Even if it’s nothing one month, you’ll still be able to live, and if it’s a lot, you’ll save… Read more »

Lisa @ The Penny Hoarder
Lisa @ The Penny Hoarder
8 years ago

Paying off any larger purchase is, indeed, liberating! We’re paying off our 2nd vehicle on a 1 year loan, and it feels great. We’re a 2 income couple with 6 kids between us – so paying off high-ticket items takes some doing. Thanks for a great post – I enjoyed it!

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