How to Automate Your Savings with Variable Income

Just about every person I know who’s been able to continually improve their financial situation does one thing well: automate their savings.

I’ve experienced the benefits personally. Along with simply tracking my spending, I consider this to be the most powerful financial habit I’ve ever created.

And I’ve seen it with clients. The more they automate their savings, the more shocked they are at just how quickly they’re able to make progress towards their biggest goals.

But it’s not always an easy habit to implement when your income fluctuates from month-to-month.

Whether you’re self-employed, working on commissions, full-time with a side gig, or any other situation with variable income, how do you automate your savings in a way that effectively straddles the line between two big risks:

1. Running out of money
2. Not saving enough

In this post I lay out a 7-step process for doing just that.

By the end of it, you’ll know exactly how to automate your savings and make consistent progress towards your biggest financial goals, no matter how variable your monthly income is.

Step 1: Create a buffer

The first priority is ensuring that you always have enough money to cover the basic necessities.

I would start by building a basic emergency fund that’s available for all of life’s unexpected expenses.

But when your income is inconsistent, you face more short-term risk than most people.

So on top of your emergency fund I would build a savings buffer of at least one month’s worth of expenses.

Then, when you have a down month in terms of income, you can simply take some money out of this savings account to fill the gap and cover your expenses.

Step 2: Automate your minimum savings

In most situations there’s a base income you can expect to earn in most months.

Take that income, subtract your basic expenses, and you’re left with an amount that can be safely saved each month without worrying about running out of money.

Automate that amount towards whatever savings goals are most important to you. That way you’re making some progress each month, no matter what.

Step 3: Prioritize your financial goals

Write down a prioritized list of financial goals that you would like to be saving for above and beyond the minimum savings you set up in the previous step.

Number them so that you clearly know which ones are most important. And set a monthly savings target so that you know exactly how much you’d like to be saving for each goal.

Here are two posts that will help you create this list:

• 6 Steps Towards Creating Your Ideal Life
• Setting Your Financial Goals: A Basic Order of Operations

Step 4: During lean months, draw on your buffer

Any month where your income is lower than your expenses, you can draw on the buffer you created in Step 1 to fill the gap.

Step 5: During good months, first replenish your buffer

Any month where your income is higher than your expenses, the first step should be replenishing your buffer to whatever level you set in Step 1.

This ensures that the next time you have a lean month, you’ll have enough in savings to handle your basic expenses.

Step 6: With extra money, refer to your list of priorities

If your buffer is full and you still have extra money, you can refer to the list of financial priorities you created in Step 3 to decide what to do with it.

First, put money towards Goal #1 up to the monthly savings target you set. Then move on to Goal #2 and keep working your way down the list until you’ve run out of extra money.

While this isn’t exactly automatic, there’s no stress or confusion around where the money should go. The decisions have already been made and all you have to do is take the steps to execute them.

Step 7: Re-evaluate

Your base income will likely increase or decrease over time. Your financial goals will change as well.

So while the overall system can stay the same, you’ll need to tweak certain specifics as your situation changes, like:

1. The size of your buffer
2. Your minimum amount of automated savings
3. Your list of priorities and the amount you want to save towards each

I would set a calendar reminder to review your situation every 6-12 months and make adjustments as needed. That way you’ll always be able to stay on track for the goals that matter most to you right now.

Do you have variable income? If so, how do you handle it?