Lots of personal finance advice assumes you have 12 or 24 or 26 equal paychecks each year. But if you’re a person or family with a fluctuating or irregular income, much of that advice won’t work for you.
We’re such a family, and if you have income from any of the following sources, chances are you are too:
- Commission sales
- Business income
- Seasonal income
- Hourly income
- Freelance income
- Bonus income
Now an irregular income doesn’t have to be all bad; many highly compensated people have incomes that fluctuate dramatically.
But an irregular income does pose a particular challenge, and that’s what we’ve experienced: even though we’re very happy with our overall income number, it doesn’t arrive in nice, even installments each month.
In fact, it looks like this graph, which represents our total income by month over the last year.
As you can see, we can’t manage our money the same way month in and month out. And it’s been this way as long as I can remember, since the bulk of our income our entire married life has come from commission sales.
Here are some things I’ve run across over the years that have helped.
1. List Expenses from Most Important to Least Important
Years of listening to Dave Ramsey’s radio show have taught me this technique.
Dave often advises callers with irregular incomes to list their monthly expenses in order of importance, from the most important (roof over your head, food in the refrigerator) to the least (vacations, entertainment, eating out). Then, when your income arrives each month, go down the list, allocating whatever money is available that month according to those priorities.
In low income months, your money probably won’t cover the least important stuff. But in high income months, you’ll have money left over to save for future lean months. (At least you should. If not, the expenses are likely the problem, and not the income fluctuations.)
2. Use Sinking Funds
Bills that don’t come due every month – like property taxes, insurance premiums, or car repairs – can wreck havoc with any budget, but especially one that relies on irregular income.
Creating a sinking fund for these expenses will help insure that the money is there when it’s time to pay up.
To come up with a monthly contribution amount, divide the total annual cost of each expense by 12. Folks with a predictable monthly income can contribute that same amount to the sinking fund each month, but families with an irregular income will need to overfund in the flush months so you can skip the contribution in the lean months.
(Note: Online savings accounts are perfect for sinking funds. See How to Create Accounts for Individual Savings Goals at ING/Capital One 360.)
3. Keep Fixed Expenses Low
As someone who doesn’t like following budgets, I’m always looking for alternatives. That’s why this last tip has been the one that has worked the best for me: keep your fixed expenses low. As low as possible.
If your monthly expenses regularly exceed your income for that month, it’s easy to go into debt when you have a low income month.
When your income takes a jump, even if you repay the debt, you’re not really moving ahead. You’re just returning to where you were.
We did this for a lot of years. Whenever we had a high income month, it seemed there were always too many places for the money to go; too many debts we wanted to pay off.
By keeping fixed monthly expenses low, however, it’s easier to get by during low income months and you can use high income months to fund bigger goals.
That’s exactly what we experienced last year.
Since we’ve paid much of our debt, we used our high income months to do things that felt so much better than paying down a home equity loan or a credit card.
- Fully funding our IRAs
- Stashing $6000 in each kid’s 529 account
- Funneling a large amount to savings
Using the income graph from above, it’s obvious that our goal should be to keep our monthly fixed obligations in the purple area.
That way the lower income months can cover our fixed expenses and the higher income months can be used to fund the rest. The closer we can stay to this goal, the better we can make the most of our irregular income.
Have you experienced a fluctuating or irregular income? What techniques have been helpful to you?