Living Well on a Feast to Famine Income
Living on a fluctuating income can wreak havoc on a person's finances. I should know; my income is slightly erratic from season to season. From October through June, my income is steady and stable with an occasional fluctuation — a surge of income one month, or a great reduction the next. Then, from July through September, my income drops like a brick and remains lower than normal, but constant, over the summer months. What I've learned through trial, error, and a great many tears is that living on an erratic, fluctuating income means coming up with a plan many months before hitting the low point of the year. (See also: 5 Tried-and-True Strategies for Saving When Your Income Isn't Consistent)
Make a Plan; Set up a Budget
Setting up a budget takes a little planning and getting into the habit of recording expenses and income. For instance, I use QuickBooks for my check register and categorize my expenses. I've set up categories for everything from rent to utilities to Starbucks. Since QuickBooks allows me to pull reports over time, I've been able to get a good idea of my average income for the year; a very important average for someone with an unstable income.
Since I have accumulated a lot of data over the years, I have a good idea of an average income and expenses over a 5-year period. Not wanting to over-estimate my income in any given year, I take the lowest amount over a five-year period and base my monthly budget on that average (dividing the annual income by 12 months). This is my base salary that I work with. For instance, if my lowest annual income in a given 5-year range was $63,000, I can use the monthly average of $5,250 to portion out how much will go into each expense category: rent, utilities, insurance, car, groceries, savings, etc.
Knowing that there's a good chance I might make more in one month than the next, I set aside the difference and plan ahead for the next month.
Create a Slush Fund
My budget dictates the expenses I must pay. However, in the months where I've ended up with a windfall, I set aside a portion of it in a "Slush Fund" account for next month's bills. My slush fund is basically a savings account that is connected with my regular checking account allowing me to easily transfer the money to and from accounts. One month I might be able to save a couple of thousand dollars in my slush fund, while the next, I might have to pull out most of the slush fund money if my income was insufficient.
Obviously, I've learned the hard way that I must be diligent and stick to my budget for this method to work. Before I became financially savvy and responsible, I would spend all the windfall money one month, then freak out the next when I had trouble digging up enough dough to pay the rent. Living with the stress of not knowing how to pay the bills from one month to the next is not a fun way to live.
Save for a Rainy Day
One of my monthly budget categories is savings, which is different from my slush fund money. Every month, I set aside a small portion of my income towards a separate savings account no matter what money I have coming in. That way I have a solid emergency fund in case I encounter a couple of famine months in a row. If I happen to hit a streak of luck where windfalls just keep coming, I increase my savings amount and still set aside the majority of the extra money into my slush fund, anticipating a slower month in the future. I try to budget ten percent of my income towards savings; most months I can reach this goal.
My idea behind the emergency fund money is it is only to be touched in an emergency, like an unexpected visit to the vet or an unforeseen car repair. The only other time I allow myself to touch this fund is when I run into a couple of months of below normal income. However, my slush fund is usually sufficient to cover one month of expenses at the minimum, if not two. I've set up a separate online savings account for my emergency fund that makes it a little more difficult to access, reducing any spur of the moment loss of sanity spending spree.
It took me quite a few years to figure out how to successfully live on a roller-coaster type income. Yet, recording my expenses and income and setting up a budget has made me realize it's not an impossible feat. Now that I understand I have to save the extra income in any given month has reduced my anxiety by allowing me a cushion of freedom.