Thursday, September 23, 2010

Variable Income = Budgeting Disaster

I've been self-employed for almost six years now and in all that time, my income has never been the same in any two like periods. To say I have a varying and fluctuating income is putting it mildly.

When you have a variable income, it can wreak havoc on the best laid budget. If you allocate a certain amount of your income to monthly bills, like rent and hydro, and then your income isn't enough to pay for it, how do you deal with that?

I've found that from month to month, my income is not stable. There are times of both feast and famine in my line of work. One thing that I've learned is that I must put away extra in times of feast, for the times of famine. When I've had a good month, I can't allocate every dollar for immediate use. I must set some aside in case next month I need it to make a debt or bill payment.

Let's say I've earned enough this month to pay for almost all of my regular expenses. Then some contract work becomes available. With the 'additional' income, I can finish paying for this months expenses and set some aside for next month. If the additional income is $600, I immediately set aside half that amount. $300 will go into my various savings pots; $150 into my Emergency Essential Expense Acount, $75 into my RRSP and the other $75 will be divided into planned spending/savings categories. The other $300 will go into my cash flow to pay part or all of any bills left unpaid at that point in the month.

There are several benefits to this type of budgeting. I am Paying Myself First. A portion of all my income from this point on goes into my RRSP, for my future because I may not want to work forever. I am also learning to live on less, and living within my means. I am no longer using debt to finance my life. If there is a lean month, I can take from the EEE fund, without guilt. That is what it is there for. Essentially, I have created my own line of credit, without the interest fees.

Sometimes there are several lean months in a row. Life happens. I take my basic monthly budget and cut back as far as I can. I cut the grocery and transportation categories in half. If needed, I can cut back, but not out, the amounts I put into savings/planned spending. I will even trim the debt repayment amounts if necessary.

Budgets aren't set in stone, and must be as fliud as your income. If you have a steady income, then your budget should remain relatively stable.

How do you plan for a variable income and how does that affect your budget? Please share your secrets with me.

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