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How to Build an Emergency Cash Fund When You Have Irregular Income

Tens of millions of Americans have nothing in the bank to cover an emergency.

That’s the takeaway from a 2018 Bankrate survey of 1,000 American adults, reported by CNBC. According to the survey, about 25% of Americans – 55 million people – have no emergency savings. A majority of millennials and Gen Xers find themselves in this boat. Baby boomers do marginally better, and most members of the silent generation (those born in the Great Depression and World War II years) are comparatively flush.

For younger workers without significant savings, any sustained period of unemployment or underemployment presents a potentially catastrophic financial threat – and that’s assuming no major unexpected expenses arise to complicate things further. Those workers most likely to contend with periods of inconsistent income, or for whom irregular income is a baseline condition, include the roughly 21.4 million people the Bureau of Labor Statistics defines as contingent (temporary) workers, independent contractors (freelancers and solopreneurs), on-call workers, temporary help agency workers, and workers provided by contract firms.

These workers struggle to string together workable household budgets, let alone build emergency savings sufficient to cover the recommended three to six months of living expenses. I would know; I’m one of them.

But there is hope. Over several years, I’ve managed to build a comfortable emergency fund that’s distinct from my long-term savings, home maintenance, and goal-oriented savings funds. If I can do it, so can you. Here’s how.

Laying the Groundwork for Regular Emergency Fund Contributions

Let’s assume you’re starting with no significant emergency savings fund. Your long-term goal should be an emergency fund sufficient to replace three to six months’ expenses – the more, the better. You’ll need that amount to deal with contingencies like:

  • Delinquent clients or employers
  • Unexpected work furloughs for which you won’t receive back pay
  • Seasonal declines in demand for your services
  • Major unexpected expenses, such as a big car repair not covered by insurance
  • An injury or extended illness that leaves you unable to work for some time (disability insurance can help, but won’t replace your entire income)

Saving up this amount may take years, but don’t get discouraged. The important thing is that you get started and do what you can to keep getting closer to this goal. In roughly sequential order, here’s what you need to do to lay the groundwork for it.

1. Sign Up for a Free or Cheap Budgeting App

To be clear, you can build an emergency fund without a budgeting app. However, creating and maintaining a personal budget the old-fashioned way can be a real drag, and an app can make it much easier.

If you need budgeting motivation or guidance, sign up for a free or cheap budgeting app. I’m partial to Mint, but PocketGuard is a lean choice that tracks your available spending money day by day. If you’re someone who needs a nudge to remember to save, look for an automated savings app like Digit or Acorns, both of which have reasonable fee schedules.

2. Tally All Non-Discretionary Expenses

Next, establish your household spending baseline. This is the sum of your current essential expenses – those you’d make first in a real income emergency:

  • Housing (rent or mortgage escrow payments, which include principal and interest, taxes, and homeowners insurance)
  • Groceries (not restaurant meals)
  • Utilities (electricity, water, gas, telecommunications)
  • Non-housing debt payments (revolving debt, such as credit cards, and installment loans, such as car notes and personal loans)
  • Child care
  • Taxes (either withheld from your paycheck or paid quarterly)

These expenses shouldn’t vary too much from month to month. We’ll explore ways to trim them below.

3. Tally & Adjust Discretionary Expenses

This is a bit tougher than adding up your non-discretionary outlays, which – if you don’t know them by heart – are for the most part readily accessible in your bill drawer, bill pay suite, or payment card statement.

Here’s how to add up your discretionary expenses:

  • If you mainly use your debit card for purchases, comb through your bank account statements.
  • If you mainly charge purchases and pay them off in full by your statement due date, comb through your credit card statements.
  • If you mainly use cash, track or reverse-engineer your spending over a period of months.

You may use a mix of these payments, in which case you’ll need to do all of the above.

If your income is irregular, your discretionary spending is likely to be irregular too. So you’ll want to look back a minimum of six months, and ideally 12, to calculate your average monthly discretionary spending. If your income is predictably irregular – with clear seasonal variation, for instance – then look back far enough to capture both lean and flush periods.

If you’re making regular contributions to non-emergency savings buckets – such as contributing to a tax-advantaged IRA or qualified plan, or saving each month for a down payment on a house – include those in your discretionary calculations. These contributions are discretionary because they’re not strictly necessary; you’d pause them to deal with a severe fiscal crunch, and may well do so in tough times.

4. Calculate Your Average Monthly Income

You know how much you earned last year, but could you say how much you earn in the average month? If not, it’s time to figure that out.

This is a backward-looking calculation. It’s not the time to make any forward-looking assumptions about revenue growth, even if you’re taking concrete steps to increase your income in the months ahead.

As with your average discretionary expense calculation, go back far enough to encompass seasonal ups and downs, if any. Ideally, that’s a full 12 months, but you should go back longer if your income is truly irregular, with no predictable seasonal variation, or if you’re vulnerable to extended furloughs during which you earn little to no income.

5. Find Your Effective Savings Rate

Perhaps you’re already saving for defined goals or making regular contributions to a tax-advantaged account. Maybe you’re simply spending a bit less than you earn, on average, and adding the remainder to a savings account each month.

In any case, the simplest – if not the most accurate – way to calculate your effective savings rate is to:

  • Add your average monthly discretionary and non-discretionary expenses
  • Subtract this figure from your average gross monthly income
  • Divide the difference by your average gross monthly income
  • If your discretionary expenses include scheduled savings, add those back to your income before subtracting your expenses.

Don’t worry if your effective savings rate is close to 0% right now. You’ll work to boost it over time.

6. Calculate Your Ideal Emergency Fund Size

Now, for the scary part: calculating your ideal emergency fund size.

For Non-Seasonal Workers

If your income isn’t highly seasonal and you’ve gone back far enough to cover lean and flush periods, you can simply take a multiple of your average monthly non-discretionary expenses. Three months’ expenses is the minimum recommended cushion, but six months’ expenses is ideal. So if your monthly non-discretionary expenses average $3,000, your minimum target cushion is $9,000, and your ideal cushion is $18,000.

During a long period of low or no income, or while you’re dealing with a major unexpected expense that forces you to draw on your emergency fund, you should pause the vast bulk of your discretionary spending – although it’s OK to save for occasional low-cost treats, such as a trip to the movies, to maintain your sanity during what’s likely to be a stressful period.

That doesn’t mean you must defer long-term or goals-based savings, particularly if you’re preparing for a looming deadline – say, your oldest child’s first semester of college – or are unwilling to budge on your targeted early retirement date. If you’re committed to maintaining your prior saving and investment contributions as much as possible during a rough patch, factor that portion of your discretionary expenditures into your emergency fund calculation. A three-month emergency fund sufficient to cover $3,000 in monthly non-discretionary expenses plus $300 in monthly savings totals $9,900; a six-month fund with the same cushioning power totals $19,800.

For Seasonal Workers

If it’s possible to predict seasonal fluctuations in your income and expenses – for instance, you work in a tourism-related occupation in a seasonal beach town – then your emergency fund must be generous enough to get you through three to six bad months, including what would typically be your peak earning and spending period for the year. That’s because you probably already sock away money earned during your busy period for the low season – in other words, you live off your savings when business is bad.

Later, we’ll discuss strategies to reduce income seasonality, but for now, assume that you’ll need to replace the peak-season income that normally goes toward short-term savings. So if you earn $6,000 per month during your three peak months, $1,000 per month during your six off months, and an average of $3,000 per month during the remaining three months, your emergency fund should range from $18,000 (three months’ peak-season income) to $36,000 (six months’ peak-season income).

Don’t be daunted by your emergency fund target. You’ll be working to build your fund over many months, and probably years. Your target fund size is a long-term goal that, for now, you can set aside as you work toward near-term, incremental milestones.

7. Create Separate Accounts for Income and Short-Term Spending

If you haven’t already done so, establish separate accounts to manage your income, expenses, and savings.

If you’re an independent contractor or sole proprietor with a legal business structure, open a business checking account to receive income. If you’re not formally incorporated or you’re not qualified to incorporate because you’re classified as a traditional employee, open a second personal checking account to receive income only. A savings account may also work, provided you make no more than six withdrawals each month.

Next, open a high-yield savings or money market account through CIT Bank. You’ll use this to build your emergency fund. You’ll make regular contributions into this account and won’t touch its balance unless a qualifying financial emergency strikes. The hope is that, eventually, you’ll have multiple savings accounts for various other types of savings.

8. Pay Yourself a Zero-Sum Budget Salary

Finally, begin paying yourself a salary equal to your zero-sum budget. This is the exact amount you need to cover your monthly discretionary and non-discretionary expenses (not including previously scheduled savings) in an average month, and not a penny more. At the beginning of the month, transfer your zero-sum salary from your business or income checking account to your personal checking account. Then, distribute the remaining income in your business or income checking account to your emergency fund and any other savings accounts.

To make your zero-sum salary work, you’ll need to cap your discretionary expenditures at a realistic level – say, 5% or 10% above your running average – to account for natural variation. This is your new spending baseline. You’ll work to cut it down as you build your emergency fund.

Emergency Fund Cash Wad

Building & Maintaining Your Emergency Fund

Now that you’ve laid the groundwork, it’s time to begin building your emergency fund and maintaining it, come what may. Use these strategies to trim your expenses, increase your income, and keep the faith.

1. Set Incremental Emergency Savings Goals

You know you’re not going to reach your target emergency fund size in a single month. Still, it’s natural to harbor unrealistic expectations about just how fast you’ll be able to save, even if you’ve carefully calculated your current income, expense, and savings baselines. Incremental goal-setting is your friend here. Set reasonable goal milestones, such as monthly or quarterly, to stay motivated and on track.

Use your current savings balance and savings rate to set your first goal. For example, if you have $500 in the bank already and you’re saving 3% of your $3,000 average monthly income, you’d aim to save $90 in the first month, or $270 in the first quarter, boosting your emergency fund total to $590 or $770, respectively.

Set savings deadlines in terms of months or weeks, rather than the amount saved. For instance, you might aim to have one month’s expenses saved by nine months from today. Maintain momentum by treating emergency fund contributions as non-discretionary – the last line items you cut from your budget before dipping into your emergency store. And be realistic; irregular income is, by definition, unpredictable, so don’t be discouraged by an unexpectedly lean month during which you must pause your emergency fund contribution.

2. Issue “Line Item” Spending Vetoes

The steps remaining have one unified goal: accelerating your progress to your emergency fund target.

First up is your discretionary budget’s low-hanging fruit. Comb through bank and credit card statements, looking for unnecessary one-off or recurring purchases without which your balance sheet would be better off. These might include:

  • Costly subscription services you don’t fully utilize, such as a pricey cable package, meal kit, or personal stylist service (switch to streaming services, recipe-based cooking, and regular trips to the thrift store)
  • Periodic splurges, such as high-end restaurant meals and spa days
  • Impulse buys of any kind (online impulse buying is especially insidious)

While you can’t undo past unnecessary spending, you can trim or eliminate it going forward. Cancel, downgrade, or renegotiate your monthly subscriptions through a service like Truebill, then make a list of any splurges and impulse buys you tend to make. Post the list where you’ll see it often, such as above your home office desk. Commit to avoiding impulse buys altogether and sharply restricting splurges; for instance, you might allow yourself a single fancy restaurant meal per year, maybe on your birthday or anniversary.

3. Set Category-Based Spending Limits

You don’t have to go all in on envelope budgeting – the cash-based method where you spend only what you’ve stuffed in category-specific envelopes at the beginning of each month – to adopt its basic principles. Use your budgeting app to segment all discretionary and non-discretionary spending into sensible categories. Some apps do this automatically, though you can customize your categories to fit your lifestyle.

Set spending limits for each category. With your wholly unnecessary expenses on the cutting room floor already, your new limits should be lower than your current average category baseline, immediately freeing up additional funds to contribute to your emergency savings. Adjust your monthly emergency fund contributions and balance goals accordingly.

For example, if you’re currently saving $90 per month, and you free up $200 per month with category-based spending limits, add that $200 to your monthly emergency fund contribution. That raises it to $290 per month and boosts your effective savings rate almost to 10%. At that accelerated pace, you’ll shrink the time needed to meet an emergency balance of one month of income from 28 months to just 9 months.

Repeat this process at least once per year. It’s always a good time to look for opportunities to tighten your category-based spending limits further.

4. Squeeze Savings Out of Baseline Spending

Trimming your non-discretionary budget is admittedly more difficult than slashing discretionary expenses, but it can be done. Consider these options:

  • Rework Your Grocery Budget. Whole books have been written on this topic. Strategies include buying ingredients in bulk and cooking multi-serving recipes to last through the week, joining a warehouse club to capitalize on wholesale discounts, preparing freezer meals in large batches, and reducing meat consumption or adopting an entirely vegetarian diet. Plus, you can use savings apps like Ibotta to save even more on your shopping trips.
  • Reduce Transportation Spending. Make fewer, better-planned trips in your personal vehicle. Carpool with coworkers. Switch to public transit for commuting, if feasible, and purchase a weekly or monthly transit pass.
  • Tackle Cost-Effective Home Improvement Projects. Prioritize home improvement projects that reduce homeownership costs through lower utility bills and deferred maintenance.
  • Make Your Home More Energy-Efficient. If there’s no room for energy-efficient home improvements in your budget, focus on incremental efficiencies. Turn the thermostat down in the winter and up in the summer. Wrap your windows to reduce drafts. Forgo air conditioning on mild nights and look for opportunities to reduce air conditioning costs in general. Use smart light bulbs to eliminate wasted electricity. Take shorter showers and run larger laundry loads.
  • Find Hidden Opportunities to Reduce Housing Costs. If you own your home, contest your annual property tax assessment, defer any non-required mortgage principal payments until your emergency fund is in place, and consider refinancing if you qualify for a substantially lower rate – at least 2% lower, to offset closing costs. If you belong to a homeowners association, volunteer your time and talents in exchange for a fee reduction or waiver – for example, by cleaning the neighborhood pool or clubhouse. If you rent, make your landlord or property manager the same offer. One of our old neighbors shoveled our apartment building’s steps and sidewalk in exchange for a modest rent break; a friend of mine gets something like 50% off her monthly rent as her building’s resident common-area cleaner.

The one major exception is revolving debt service. High-interest credit card balances require your full attention. Rather than paying the minimum each month, devise a plan to pay down your card balances as quickly as possible and defer any concerted savings efforts until you’ve done so. Saving is far easier without high-interest debt burning a hole in your pocket

5. Funnel Windfalls Into Your Emergency Fund

Windfalls might include:

  • Your annual IRS or state tax refund
  • An unexpected bonus from a client or employer
  • A higher-than-expected income month
  • Excess proceeds from a successful insurance claim
  • A small inheritance or assets transferred for your benefit (for instance, being named as the beneficiary on a deceased relative’s savings account or receiving an annual required distribution from an inherited IRA)

If you’re fortunate – or unfortunate, in the event of a tragedy – enough to receive a more substantial windfall, such as a sizable inheritance from a deceased family member, consult a credentialed financial advisor such as a Certified Financial Planner to determine how to proceed.

Pro tip: If you don’t have a financial advisor, SmartAsset has a useful tool where you can find advisors in your area based on a few simple questions.

6. Look for One-Time Opportunities to Raise Money

Why not make your own windfall? The sky’s the limit here, but one of the easiest ways to raise extra money in relatively short order is to sell stuff you don’t need. Here’s how:

  • Clean out your attic, basement, or storage unit.
  • Separate items for which there’s a likely resale market (even if that value is trivial) from items that are better given away or tossed out.
  • List particularly valuable or specialized items on Amazon, eBay, Craigslist, Etsy, or Nextdoor.
  • Take potentially valuable items that you don’t want to resell individually to wholesale buyers.
  • Hold a garage sale for bulky or non-specialized items.

If you have a lot of stuff, there’s serious earning potential in this strategy. After cleaning out our attic, and without really trying, my wife netted $50 from the sale of two oversized pregnancy pillows and at least $300 from the sale of a few dozen unwanted records.

7. Start a Side Hustle or Part-Time Job

The sky’s the limit here too. Whatever pursuit you feel is worth your time, and that aligns with your skills and resources, is fair game. Common examples include:

  • Delivery Driving. With tips, restaurant delivery drivers through services like DoorDash or Postmates can expect to net $10 to $15 per hour after expenses. Couriers working for major logistics firms or retailers such as UPS and Amazon may do a bit better. You’ll need a fuel-efficient vehicle so that fuel costs don’t eat into your earnings too much.
  • Gig Economy Work. Gig work includes driving for ridesharing apps like Lyft and Uber, doing one-off jobs for platforms like TaskRabbit and Handy, and renting out a spare bedroom on Airbnb. Under the right conditions, you can cut out the middleman and hire yourself out directly; for instance, in areas far from major airports, part-time airport transportation providers make out well.
  • Rent Your Car: Through Turo you can make money by renting your car to others in your area.
  • Contract Labor. Hire yourself out as a landscaper, building maintenance worker, moving helper, or semi-skilled tradesperson.
  • Professional Consulting. This type of work usually complements your day job; for instance, if you work in nonprofit donor management by day, you might moonlight as a grant writer by night.
  • Seasonal Work. Seasonal part-time opportunities abound. You might work in retail a few hours per week during the holiday season, for example. My cousin loves giving hay rides at an apple orchard each fall, and he makes a few hundred extra dollars each year for his trouble.

8. Be Open to Drastic Change

Finally, be open to more drastic lifestyle changes that could reduce your expenses and build your emergency fund faster than anything we’ve discussed thus far.

Selling your car is a prime example. Whether you go totally car-free or simply reduce the number of cars in your household, you’ll save a boatload on car loan payments if you’re still making them, as well as on fuel, insurance, and registration fees. Selling our old sedan in a private-party transaction was one of the smartest financial decisions my wife and I have made since buying our house. We put the full sale price – $2,000 – into our shared savings right away.

Final Word

I spent the better part of two years building a multi-month emergency fund, and I was fortunate enough to start with a decent store of unallocated savings. Millions of freelancers and contingent workers begin with nothing. A 2017 Federal Reserve survey, reported by CNN Money, found that 40% of Americans can’t absorb a $400 unexpected expense. Functionally, 4 in 10 Americans live paycheck to paycheck.

I’m sympathetic to hustlers for whom the thought of building a multi-month emergency fund on an irregular income seems incomprehensible. It’s hard work, and it’s almost sure to take longer than you’d like. However, every little bit helps. Get started now, and don’t give up hope, and you’ll eventually save up enough to cover an emergency if and when it happens.

Are you in the process of building an emergency fund on an irregular income? Or is the process too daunting to even contemplate right now?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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