How to Save Consistently with Variable Income
How to help create financial security with unpredictable income
For many Americans, a consistent paycheck isn’t the norm. In fact, according to a report from the Federal Reserve, nearly one in three adults deals with income volatility — earnings that vary from month to month. And unpredictable income could make future planning a very real challenge.
But fluctuations and uncertainty in your income don’t mean that money matters have to be out of your control. With some forethought and smart strategies, you can help save and build your future consistently.
Here are three strategies to consider:
Plan for the expected.
In some situations, income shifts are foreseeable. Teachers can anticipate the lull of summer break, and seasonal businesses know when their periods of high demand are ending.
So, if you have a sense of when to expect income variation throughout the year, you’re in a prime position to plan accordingly. After all, with foreknowledge of leaner months on the horizon, you can use history as a guide. Look at past years to estimate how much you may expect to bring in and, therefore, how much you may need to supplement your savings to stay afloat.
If you expect an upcoming decrease in your take-home pay or employment hours, consider looking early for alternate sources of income. You may be able to supplement your existing job with a second one or pick up some freelance work on the side.
Maximize your emergency fund.
When you routinely see peaks and valleys in your income levels, it’s likely that you need to tap your savings on a regular basis. And you may need to pull more from your account than someone with a steady income.
So one way to help prepare is to get your emergency fund in fighting form. Most experts recommend that adults save enough to cover a minimum of three months of their expenses. But those with variable income may want to consider shooting for at least six months’ worth in order to have some breathing room. And, depending on your projected income and the amount you need saved up for your peace of mind, you may want to target a 12-month reserve.
How do you do it? Maximize the benefit of your high-earning months. Sure, it’s fun to spend your excess cash on life’s luxuries. But, by using your extra income to fund your emergency savings, you’ll be more prepared for those dips in take-home pay that invariably come your way.
Create two budgets.
If your income usually sits at a certain dollar value, you may have constructed a budget exclusively around that number. And, in a perfect world, you’d have stores of cash saved and accessible for when your income dips. But, if you’re light on savings during a lower-income period, it’s time to break out the backup budget.
Your backup budget is simply a stripped-down version of your everyday budget. And it’s precisely the map that will see you through tighter financial times.
To make your “Plan B” budget, make a copy of your existing budget. Cross out your usual take-home pay, and replace it with the amount you anticipate bringing home during less abundant months. Then, examine each of your expenses one by one.
Ask yourself the following:
- Is this a non-negotiable expense? Your mortgage or rent are likely fixed costs, but do you have some wiggle room when it comes to your food and clothing expenses?
- Can I delay or eliminate this expense entirely? Maybe you skip the vacation until you’re financially stable, or you put off your kitchen renovation until you can comfortably pay cash for it.
- Can I reduce this expense? Get creative! Shop sales with coupons. Buy second-hand. Make your food at home. Scale back your cell phone plan. And make a game of finding low-cost forms of entertainment.
Variable income poses a very real challenge when it comes to budgeting and planning for the future. But, with a solid action plan, you can create contingencies that will help keep your family financially secure.