Today we have a super informative post by Marc over at VitalDollar.com, sharing a few tips for living life well on an inconsistent income. With today’s fluid economy, knowing how to manage your income, especially when your paycheck isn’t always the same amount is, well, vital. And with that, take it away, Marc!
Most of the personal finance and money management advice that’s available online assumes that you have a consistent income that stays the same or has only small variations.
If you’re like me and you have an income with big swings, you may have frustration from trying to apply advice that isn’t well-suited to your situation.
When you have an income with large peaks and valleys, budgeting can be hard, and figuring out your savings rate is virtually impossible because it keeps changing.
I’ve been blessed to be able to work from home since 2008. For the past ten years I’ve been self-employed, managing my own websites and blogs. While it’s been an awesome experience, the lack of a consistent and predictable income has required some adjustments.
When I first left my full-time salaried job in 2008, my wife still had a full-time job with a consistent income. But for the past six years she’s been a stay-at-home mom. We went from being dual-income with no kids to single-income with kids. And that single income is inconsistent.
My wife and I have learned from trial and error, and in this article I’d like to share some tips that may help you if you’re in a similar situation.
1. Calculate Your Average Monthly Income
1. Calculate Your Average Monthly IncomeFirst, you should try to get an understanding of your average monthly income. You can add up the income from the past 12 months and then divide the total by 12 to get the most accurate, up-to-date number.
Of course, you can’t count on your income reaching this level every month, but it provides a good starting point for the next few tips.
2. Base Your Budget or Spending on a Below-Average Month
Now that you know your average monthly income, you can work to create a budget. My advice is to base your budget on an income that is a good bit below your average, just to be safe.
Take a look at the worst months you’ve had in the past year. Keep these numbers in mind when you budget, and try to keep the total budget close to the income from your worst months, if possible.
Even if you don’t like budgets, taking a look at what a typical month should look like can be a good use of your time.
It’s also a good idea to know the bare minimum that you will need to spend each month to pay your bills. This is just for necessities like your mortgage/rent, groceries, gas, utilities, insurance, and other expenses that you can’t avoid.
Of course, none of us want to live on the bare minimum, but knowing this number can help. You’ll know what level of income you need each month to avoid dipping into savings or going into debt.
3. Establish a Normal Level of Living
This one has been the most critical for my wife and me. We have a very inconsistent income, but we don’t allow that income to dictate how we live and how we spend our money. Our expenses and standard of living are basically the same regardless of whether we are having our best month or our worst month.
Since you’ve already calculated your average monthly income and created a budget based on below-average income, if you maintain a normal level of living you should be fine.
Don’t go wild and spend money like crazy when you have a good month. And if you do that you won’t need to panic and live like a pauper during your bad months.
It can be very tempting to blow a lot of money when you’re making a lot. It’s ok to celebrate and enjoy your money, but keep it within reason. Remember that things will probably change and you’ll need to prepare.
Spending extravagantly at times can make it even harder to live on a lower income and you’ll really feel the impact of the fluctuations. But if you establish a normal level of living you won’t be on the same emotional rollercoaster.
4. Take Advantage of the Good Times
When you have above average months it’s important to take advantage of the opportunity to save. Set aside as much as you can, because you may need it later.
5. Keep Some of Your Savings Liquid
With an income that’s up and down, you’ll probably need to access your savings at some point in order to pay your bills and cover living expenses. Be sure that you have enough money in accounts that are easy to access.
My wife and I use high-yield savings and money market accounts to keep cash in case we need it. We can have that money transferred to our checking accounts in just a couple of days.
Having an emergency fund is one of the most basic personal finance tips that you see a lot, but if you have an inconsistent income you should consider having a larger-than-average emergency fund since you’ll be more likely to need it.
If you prefer, you can keep separate accounts for your emergency fund and for bills. My wife and I have an account that we use for paying bills when there isn’t enough money coming in. This isn’t a true “emergency” because we know it will happen at times, so we keep the two accounts separate.
Related:
- How Should I Prioritize My Savings?
- 21 Exciting and Proven Passive Income Ideas
- How To Create A Budget That Works
6. Have a Fallback Plan
6. Have a Fallback PlanInconsistent income requires some adjustments with how you manage your money, but as long as you have enough good months you can also sustain some bad months. But what happens if the bad months keep coming and things don’t seem to turn around?
I like to have a fallback plan that will allow me to make some money, even if it’s not as much as I would like. For me, that fallback plan is freelancing.
I used to do a good bit of freelance writing and I know could always go back to that if needed. I might not be able to make enough to cover all of our family’s bills, but I could at least get close.
It’s a good idea to think about what you could do to make some money if you really needed to. Your backup plan could be anything from flipping things for profit to driving for Uber to working as a substitute teacher.
Hopefully, you won’t need to use your fallback plan, but it’s good to have one in case.
7. Embrace It
Living with an inconsistent income brings some challenges, but there are also some positives. If you can embrace the positives and focus on the upside, it makes things much easier and less stressful.
An inconsistent income usually means that you have the opportunity to make a good income in a short period of time. It can also be challenging, motivating, and fun. Those good months also give you great opportunities to save and get ahead faster than you could if you had the average job.
Embrace it and see how it impacts your outlook
What’s Your Experience?
If you live with an inconsistent income please feel free to share your own tips or experiences in the comments.
Marc is a personal finance blogger at VitalDollar.com where he writes about managing money, saving money, and making more money.
