Living Well on a Feast to Famine Income

Photo: deltaMike

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.

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Guest's picture

Great article. I live in a varied income too and find it's best to work with the lowest figure and throw the extras straight into savings when the money comes in. I am working at using the extra savings to pay off debt and then I can start having some fun with the big months :)

Little House's picture

Thanks, Forest. I too am paying off some debt, but I just make that part of my monthly budget. Last year I had a stellar year and it allowed me to pay off large chunks of consumer debt. I'm now down to one last consumer bill I'm working on paying off. Good luck to you!

Guest's picture

Great post. These tips will help people with regular income too. For example, saving through out the year for an annual expense (insurance premium) or an irregular expense (car servicing) will help in regulating the debt repayment & savings.

Little House's picture

@Suba - Very good point. Sometimes premiums sneak up on us; it's a good idea to either plan monthly for them, or fit them into the budget.

Guest's picture

Great post. On kind of the opposite side, I have variable expenses. For example, my kids have sports camps they must attend for high school sports every summer. The total cost for all the camps is around 1200 dollars. So I put 100 dollars away every month into a Smarty Pig account so the expense is not a shock to my checkbook when July rolls around.

You are so right that having information is the key to make any variable income or expense manageable. You are very organized and seem to be doing a great job!

Little House's picture

@Everyday Tips - It's funny you mention putting a set amount away every month for an expensive you anticipate. I am doing that exact thing with a wedding for next fall; putting $100 away each month so I'm not worried about flights, hotel, or gifts.

But it does help logging all of my expenses and income; visual graphics are the best!

Guest's picture

As a small business owner I have a fluctuating income, so I totally agree with you. Nevertheless, I suggest separating the "emergency" and "savings" funds; emergencies will come and go, and the savings shouldn't be affected by them (unless they are going to require a lot of money).

Little House's picture

@George - You're right. I actually have three savings accounts; one is my slush fund, the other is my ER fund, and the 3rd is my long term savings fund. Thankfully, I don't pay any monthly fees one them!

Guest's picture

It must be crazy tempting to NOT spend the money when you have "extra" every month!

I just got a small windfall last month, and I told myself I'd use it to pay a chunk down on the rental prop mortgage. Nope, used 20% of that chunk, and the other 80% is still in savings........ hmmmmmm

Little House's picture

@Samurai - Restraint, restraint, restraint is all I can say. It took me a long time to live by those words!

Sonja Stewart's picture

Great article! I think where we mess up is looking at a savings account as our slush fund account. Quick books is imperative to tracking down all those dollars, and I agree with Everyday Tips, you are extremely organized to have that figured out.
Thanks for the motivation and good ideas.

Little House's picture

Thanks Sonja. It probably helps that I've been acting as the quasi-CFO for my husband's business for years; that's probably why I'm so organized!

Guest's picture

This is a great idea. I think it's important to build up your emergency fund and to keep it separate from your "slush fund". I would suggest to people when setting up the slush fund, to know how much you need to spend each month (using Quicken or Quick Books is great!), and only go to the slush fund when your income is lower than that amount.

Many people my choose to splurge on something if they see the slush fund grow for a couple of months - the splurge can be planned too, but you still need discipline!

Little House's picture

Good point, Khaleef. I try not to touch my slush fund when my income is steady. Usually I'm pretty good about that. Thankfully I'm not a big spender to begin with.

Guest's picture

Great article, Jennifer. Helps me feel at peace that I will still make it with a sporadic income when I start my life being self employed. And these are great guidelines to live by. Love the 'Feast to Famine' title.

Little House's picture

Thanks, Christine. Becoming self-employed is a great opportunity; but the variable income can be hard to adjust to. All I can say is use a program such as QuickBooks or something similar to track expenses and income!

Guest's picture

This should be required reading for any freelancing professional. I've been getting a similar plan in motion for the last few months and it has helped immensely.