Tips for Handling Variable Income

Some people’s paychecks all look the same, and some people’s paychecks don’t. Those of you who work in sales or are self-employed likely understand exactly what I’m talking about.  When you are in a sales or entrepreneurial role, you usually experience variable income.  This makes budgeting harder, but also more important.

The added complexity of irregular income can be minimized with cash flow tracking or the use of extra bank accounts.  There are two approaches that I recommend.

The first approach is to create monthly cash flow statements.  

1. Create a list of all your expenses prioritized from most crucial to least.  
2. Draft a personal Cash Flow Statement that starts with your income for a given pay period – when planning ahead use a reasonably expected income, or better yet, the income earned during the same period a year prior.  This goes at the top of a Cash Flow Statement and then subtract your expenses as you pay them in the prioritized order.
3. Note any expenses you were unable to pay during that pay period, and add them into your expense list for the next pay period.  They should be included and re-prioritized as appropriate. Priority could be determined by necessity, amount, due date, etc.  

Alternatively, my preferred method is to mimic a regular income and manage your expenses via a standing budget template.  

1. Open a separate bank account that is used to receive all personal income. 
2. Create a standing budget template that includes all of your monthly living expenses.  Divide the expenses into first- and second-half-of-the-month payments.  Note the total needed for each half of the month. These amounts should be less than or equal to the amount you pay yourself.  
3. Now that you know the amount needed to cover expenses, transfer that amount to your regular checking account from your new “income” account. Many choose to do this on the 1^st and 15^th of each month.  The amount you pay yourself remains consistent regardless of your actual income for a given month.  This way a more profitable month can buffer a less profitable month.

Of these two approaches, I prefer the latter. For this reason, I recommend clients always have a separate checking accounts for business or sales income, and then pull their “paycheck” from it.  This gives a sense of consistency that smooths out the routine of budgeting and bill payment. 

As always, it is important for all of us to create a monthly budget and track our expenses against that budget at month end. This improves our relationship with money and helps us find any leaks!