Five Simple and Effective Strategies to Deal With Fluctuating Income
Fluctuating income can be a challenging problem. It can effect a wide range of people from shift workers to the self-employed. If your income is not consistent you can find yourself on a lifestyle roller-coaster, whereby when you have a good week things seem easy, but when you have a slow week (or God forbid, a month) you start to hope that the car keeps working and the fridge does not blow up.
Here are 5 steps that might help you deal with these fluctuations:
Create a savings plan (budget) so that you can plan your expenditure.
You need to make sure your household is profitable with a conservative estimate of your income. If it is a loss, then you have a whole other problem that you need to address. If it is a profit, you need to work out how you are going to apply that money to your goals. By creating a budget, you also have a benchmark for your spending that will become vital later on.
Generate a buffer or emergency fund.
This is priority number one. This might be in the form of cash in an offset account, or a redraw on your home loan, but you need something to get you through the times when the income temporarily slows down. A good rule of thumb is 3 months of your living expenses. Perhaps, use your upcoming tax return for this.
Put away an amount for irregular expenses.
If you have a good budget you will have an allocation for expenses that, although irregular, do happen. Here are some of them:
- Car maintenance
- Weekends away
- Replacing home appliances and furniture (your TV, Bed, Couch, Fridge)
- Home maintenance (Hot water system, Pest spray, Bunnings spending)
- Medical expenses (gap, dentist, pharmacy)
Too often people ignore these expenses, and then have to use the emergency fund and blow the budget when they come up. These things are predictable, and you should have an account that you put an amount into every month to deal with them.
Pay yourself a fixed amount for living so your lifestyle does not fluctuate with your pay.
If you know you will save money over a year if you earn 'X' and spend 'Y', then find a way to make sure you only spend 'Y'. Too often people live on the credit card, and at the end of the month their app or spreadsheet tells them that they have spent more than they wanted to. The horse has already bolted. But, regardless of your income that week, all that appears in your account is the $400 for groceries, petrol, dining, and entertainment, then you will find that you typically spend everything in your account, but no more. So that reduces the variable to only 'X', your income.
Watch (ie. monitor) your savings increase in-line with your savings plan.
Find a way to monitor the variables that are most likely to be off track. Are you earning what you thought you would earn? Is your dining, entertainment and cash spending as expected? If not, do you need to adjust your budget or your lifestyle? I use a spreadsheet, others use apps.
Although these are all simple strategies, I have found them to be surprisingly powerful, particularly for the self-employed who run a very tight budget and expense control for their business, but let their personal finances float along without discipline, structure and control.
Some people get very frustrated when they get a good pay, because suddenly their withholding tax skyrockets and they feel that the extra they have earnt has disappeared into extra tax. If this is the case, you should do you tax return as soon as possible. Tax is based on a yearly income. If your income has fluctuated throughout the year it is common that on the pays that you earned a lot, they took more tax than was actually required. The extra money that has gone to the ATO is not necessarily gone forever and will come back to you in your tax return.