5 Steps To Saving Consistently When Your Income Is Different Every Month

Many Business Owners — particularly those whose fledgling companies — struggle because their income is different every month. Some months bring in a rush of revenue that makes you want to break out the champagne glasses. And then you’re lucky if you can scrape by during other times of the year.

Income volatility is a real problem for many people. The Federal Reserve’s recent report on the financial health of American households found that 32% of adults experience volatility in their income, and 13% have trouble paying bills as a result.

When you never know what money is hitting your bank account next week or next month, how do you manage your finances? And how can you save consistently on a variable income? Here are five smart strategies to employ:

1. Categorize your expenses

Prepare for the worst-case scenario when your income isn’t enough to support your current monthly expenses. In those cases, you’ll want an easy list of what costs should be the first ones you cut from your lifestyle until your finances turn around.

To create this list, take a look at every bit of money that exits your wallet and put it into one of three buckets:

• Must-haves: Consider fixed costs like your mortgage and childcare costs. And estimate what you pay in any given month for variable essentials like your electric bill or gasoline consumption.
• Luxuries: These items are entirely non-essential when the money stops flowing — vacations, dinners out or a new set of china.
• Nice-to-haves: These are the discretionary expenses that aren’t out-and-out luxuries. We’re talking about things like your favorite cereal (instead of the cheapest box on the shelf) and your kid’s piano lessons.

2. Supersize your Security Buffer

When your income isn’t predictable, you face a higher likelihood than your salaried peers that you’ll need to your Security Buffer. As a result, building a larger buffer than you might have otherwise is critical.

The key is Paying Yourself First. During high-earning periods, focus on building your Security Buffer rather than succumbing to lifestyle creep. If you struggle to find the cash to save up, temporarily scale down your lifestyle — paring down your luxuries and then the nice-to-haves, if necessary — until you can increase the size of your Security Buffer.

3. Identify a minimum Pay Yourself First amount

Paying Yourself First isn’t just something you do when you’ve got money to burn. It’s exactly what it sounds like. A consistent habit that you put first, even if the amount you save each month varies across the year.

So identify a minimum amount you’ll force yourself to save every single month through automation. One approach is calculating a percentage of the minimum you expect to earn each month. Then, when your monthly income exceeds that threshold, be sure to save above and beyond that amount.

4. Give yourself a time buffer

One of the best ways to give your money some breathing room is to work toward a one-month payment buffer. Here’s what that means: Instead of spending this month what you’ve earned this month, you spend based on last month’s income.

The result of getting a month ahead is that you put yourself in a position to plan. In knowing what you earned last month, you can tweak your expenses for this month accordingly and avoid spending what you haven’t yet — and might not — earn this month.

Additionally, you can build in time for irregular expenses you know are coming down the pike. These include costs like your kids’ tuition bill, a new roof or holiday shopping. Of course, don’t forget about the estimated tax payments you’ll be responsible for if you’re running your own business. Plan in advance for these foreseeable costs, and save for them in a separate account than the one that holds your emergency fund.

5. Supplement with fixed income sources

If the uncertainty of your variable income is messing with your peace of mind, consider introducing some additional consistency into your financial life in the form of a fixed paycheck. By picking up even some part-time employment, you’ll diversify your income streams while reducing the fallout of a bad business month.

Variable income absolutely presents a challenge to owners of young or seasonal businesses. But, with the right financial strategy in place, you can save consistently and make steady progress toward building a secure future filled with opportunity.

image credit: Bigstock/JacobLund