Sep 16, 2014

Avoiding Variable Income Indigestion: How to live better on an inconsistent income.


I’m a fast eater and sometimes it can be a bit embarrassing.  Imagine that you and I are having a meal.  Our plates are served and you flap your napkin up in the air to unfold it and lay it in your lap.  By the time the napkin leaves your view you see my plate rattling on the table…empty.  That’s usually about how it goes. 

I’ll spend the rest of the meal looking at other peoples’ plates wishing I had ordered their meal or eaten a bit slower to savor each bite. 

Managing a variable income - Income for many families can be the same way, especially when it is sporadic.  It is crucial that families with a variable income manage their money well.  We see too many families that use their money like I eat my dinner--way too fast!  If you aren’t careful managing your budget with a variable income, you may wind up financially famished until the next payday comes.

Whether you work on commission, own your own business or get paid when a job is complete, a few minor tweaks to your finances can make all the difference.  Here are a few steps to help your family manage a consistent budget on a not-so-consistent income. 

Fund your future – In order to make this thing work, you will need to take a lumpy income and make it more predictable.  We’ll talk about a few steps in the process but the first action is to stop spending directly out of that income.  Use a savings account as a place to receive your variable income. Any income you receive can be placed into this account.  This account is the start of a more predictable financial plan for your family. 

Know what goes out – If you are going to thrive on a variable income, you are going to need to get personal with your monthly expenses.  You’ll want to nail down what you really need to live on each month and to settle into a realistic budget.  Add up all of your monthly expenses.  You can use a spreadsheet or a pad of paper, but without this step you’ll have a hard time getting ahead.  Use your credit card statements and bank statements to close in on these costs.  You should wind up with a list of all of your monthly expenses and a total monthly budget amount. 

Pay yourself a salary – Now that you know what you need each month in order to make it, it’s time to put yourself on a salary.  Set up your checking account to receive enough to pay your monthly budget.  You can have this money electronically transferred in from the savings account that you set up.  Now you no longer have a variable income. You have a fixed income with a budget and you are saving the difference. 

See into the future – Now look ahead at this account and the variable income that you expect. You should have more money in savings at the end of the year.  If your budget exceeds what your variable income can afford, you’ll need to start playing with the numbers.  You can reduce the amount you spend each month or you can go find more income.  If you are drawing your savings to feed your monthly budget, you are in the danger zone.  Once your savings run out you won’t have enough each month and you won’t have a back-up plan.  It’s better to make hard changes with a savings account than without one. 

Diversify your income – Once you have put this process to work and your savings account has grown, you can invest these assets. Whether you open an investment account, or invest in real estate or into your business, these new assets can help supplement your income.

Ignoring the challenges of a variable income can lead to financial indigestion. Slowing down and being thoughtful will leave you savoring the flavor of a great financial plan.

Bonus Material:
Check out the story of Joseph in Egypt. This is not a new concept. Through God's favor Joseph is allowed to lay out a prudent plan of saving during times of abundance.

I really do eat pretty quickly. My business partner compares me to the second dog in this video.

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