Dealing with an uncertain income each month can lead to anxiety. Once you have the right strategies in place, however, it becomes much easier to manage your money and plan for the future. This is particularly true when handling a variable income, where the amount you earn changes weekly. This is a common situation for people who are self-employed, work in sales or commission-based jobs, have fluctuating hourly wages, or earn from tips and investments.
Coping with a variable income can be challenging. There might be months when you are enjoying a lavish lifestyle, while other months may find you wondering if you can afford gasoline for your car. Remember, however, you are not alone in this. In the U.S., over 50 million freelancers deal with fluctuating income.
Now, let’s look at some techniques that could be beneficial when your income varies significantly:
BEGIN WITH A FINANCIAL REVIEW
Start off by analyzing your financial situation. This involves understanding the existing balance in your checking and savings accounts, your tax liabilities, and your monthly expenses. Initially, it’s crucial to gather all financial information and note it down. Evaluate your monthly income over the past year and highlight your best and worst months.
Then, lay out your financial goals for the forthcoming year, keeping in mind any potential shifts that could affect your income or working capacity.
MONITOR YOUR INCOME AND STRUCTURE YOUR BUDGET
The secret to handling a flexible income is effectively tracking all your earnings. Doing this helps determine your average monthly earnings. From this, a comprehensive budget can be created that includes all your expenses, including your personal salary if you’re an entrepreneur. When your income exceeds the average in some months, set aside the surplus to balance out lower-income weeks.
Also, contemplate opening dedicated bank accounts for business, personal, emergencies, and taxes.
CREATE AN EMERGENCY SAVINGS ACCOUNT
For entrepreneurs, freelancers, and salespeople, particularly those in the startup phase who are focused on establishing contacts, contracts, and steady business, variable income is very common. One way to navigate through lean periods is to be disciplined about putting funds into an emergency account. As a rule of thumb, you should aim to put aside four to six months’ worth of living expenses.
BE MINDFUL OF YOUR TAXES
Ensuring you set aside funds for taxes each time you are paid is crucial. The exact sum will depend on your tax bracket. Also, small business owners may need to account for various other taxes. Freelancers should bear in mind to allocate a portion of their earnings for taxes.
Consider establishing a savings account specifically for tax payments, and link it to the account where you deposit your earnings. This practice can greatly assist in managing a variable income.
SECURE HEALTH INSURANCE COVERAGE
If you are an independent professional, it is likely you need to arrange your own health care plan. For eligible people, there are federal programs like Medicare or Medicaid, and healthcare.gov also offers a marketplace for private plans.
THINK ABOUT RETIREMENT
Destination retirement may seem distant, but the sooner you start saving for it the better. This is still possible even without a traditional employer-provided 401(k). Experts advise setting aside 15% of your income toward retirement whenever you can.
LIMIT NON-ESSENTIAL SPENDING
Unnecessary expenses can accumulate over time. Look for ways to curb such discretionary spending. Simple steps like canceling repeated app purchases or magazine subscriptions, using a water filter instead of buying bottled water, or preparing your own snacks can help.
FOCUS ON INCREASING YOUR INCOME
While savings and expense cutbacks can help navigate through financial difficulties, they are not long-term solutions. Besides living comfortably with fluctuating income, you should also strive to increase your earnings to cover expenditures and afford what you desire. If you currently freelance, discover novel ways to earn from your skills.
DESIGN A FINANCIAL STRATEGY
Once you grasp how to navigate a variable income, it’s time to plan. Look ahead and avoid focusing only on immediate necessities. Set achievable financial goals initially and elevate them as you improve your money management prowess.
PAY YOURSELF
Make it a habit to pay yourself a salary from the previous month’s income based on your total costs, and transfer it into your daily spending checking account. This can be the account linked to your credit card. Initially, set a salary that matches your lowest monthly spend, and then adapt your discretionary budget accordingly.
Embarking on the journey to manage a variable income might seem daunting, yet it is entirely feasible with proper planning and discipline.
