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Dealing With Variable Income

by Don Current on May 4, 2010

Income Chart

Income Chart

The foundation of any good financial plan for your future HAS to begin with a budget. How can you hope to plan for your retirement if you don’t know what you’re going to spend next week?

Maybe one of the reasons you’ve never been able to get a budget to work is that you’re income is not stable. This could be your situation if you’re self employed, work in sales on a commission, or if your work is seasonal. If this situation describes you, it doesn’t mean you can’t develop a budget. Your expenses are still going to occur regardless of what you make, right?

So first, let’s talk about your expenses. You need to identify what you spend each month for the necessities. That’s food, shelter, clothing, and transportation primarily. Then begin to list out your other expenses. Things like cell phones, medical expenses, cable, pizza money and whatever else consumes your hard earned ¬†money each month. Try to list them in a priority order with the basic necessities at the top all the way down to things like credit card bills at the very bottom of the list. Now compare these expenses to what you actually averaged in income in prior years. If your expenses are too high or too low, you need to go back and make some adjustments.

So you’ve written down what is going to consume your money. Now let’s talk about the income. You probably have at least an idea of what you’re going to be making, so write that down and plan out your month as best you can based on that estimate.

So let’s say that you do this, and you know you’re going to come up short of covering all of your expenses this month. What are you going to do? Here’s the key to this whole process. Unless you’ve got some money saved aside, you’re going to have to decide what doesn’t make the cut. That’s why you listed things in priority order. Move down the list until you run out of money, then draw a line. Anything under the line just isn’t going to make it this month. The facts are the facts.

Now, as you begin to actually move through the month, you’ll need to keep track of your actual income and expenses and make adjustments. Maybe you earn a little more and can cover a few more bills, maybe you make a little less and have to cut other things.

Ideally in those months where you do make more than you spend, you need to set that money aside in a savings account where you can access it in the more lean months. You have to learn how to get your expenses down to where on the average they match your income. Or alternatively, you’re going to have to bring in more income. Only the government can continue deficit spending year after year.

I hope this helps you understand how to account for variable income. Regardless of your income, your expenses probably remain relatively consistent from month to month, so you just need to get that figured out, and then spread the money as far as it will go. Hopefully then you’ll be able to pull from your savings to cover the lean times.