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Affording Your Expenses On Income That Keeps Changing

Many people working in our society do not earn a consistent income throughout the year.  We have seasonal workers who, due to weather or economic pressures, are only able to be employed during specific times of the year, relying on employment insurance benefits during the non-working months.  And there are many more of us who earn a fluctuating income week to week, either due to the industry we work in (retail, restaurant, etc) or the time of year (for example, snowplow operators or lawn maintenance staff).  

When you’re faced with a fluctuating income it can often be difficult to effectively budget your money month-to-month, and that means financial commitments such as credit card bill payments, often slip due to lower income.  . The reality?  More of us are moving away from the “typical 9-to-5” job and taking on non-typical employment, whether it’s contract work, commission-based earnings, or even “gig economy” income (such as Uber and DoorDash).  

Fluctuating income or irregular income can make setting a budget difficult. Those who earn the same amount every pay period know exactly how much money they have coming in and can budget to spend less than they earn. However, those of us who earn different amounts each week or month (or don’t even know how much you’re going to make at any given time) have a much tougher time creating, tracking and sticking to a household budget.  And if you’re on a fluctuating income, budgeting becomes even more important since you need to be able to budget and pay for the same monthly expenses despite not earning the same money each month.

To help those of us on a fluctuating income, here are some tips for budgeting income and affording your expenses:

Determine Your Base Income

The first step is to review the income you’ve earned over the past few months and see if there is any consistency to those amounts. Is there a certain base amount you always manage to earn? If there is, then consider this your “base income.” This is the amount that you could reasonably expect to earn most months. If this isn’t enough to cover your fixed  expenses (such as rent or mortgage, utilities, transit, etc), then you will need to take a sharp look at your expenses and see items that can be reduced or cancelled (for example, a Netflix subscription).  You can also devise a flexible plan where you put money aside in the months where you earn more so you can use those funds during the months when you haven’t earned as much.

Those of us on a commissioned income (such as real estate agents and retail salespeople) will have a tougher time determining a base income but it can be done.  You might have to use the entire year as your canvas for charting out your basic income, averaging the income flowing in over a one year period into twelve monthly amounts to arrive at a basic income you can budget against expenses.   

Use The Previous Month’s Income This Month

This strategy does take some planning and discipline but it could be helpful to try to live off last month’s income this month. The first step in handling your budget this way is to start saving up a full month’s worth of salary over time (and it may take you many months to do this).  Once you do, you will always have about one-month’s worth of earnings in your bank account to use as new income flows in for the subsequent month. Then, create a new budget each month based on how much you earned the month before. 

Track Everything

When you’re budgeting, it’s always critical for you to track your spending. And that means marking down every single item you buy.  I recommend a small paper notebook and a pencil in your pocket or purse so it’s always handy.  If you own a smartphone you can use a simple notepad app or even a sophisticated expense app to track these items.  Tracking every expenditure becomes even more important when your income fluctuates all the time. 

Throughout the month ensure you track every purchase that you make. At the end of each week sit down and add up all the expenditures and try to bundle like-minded expenses together (for example, daily lunch purchases, or that morning Starbucks coffee).   Doing this every week allows you to change direction quickly if you find that you’re spending more on these items over time than you expected (or earning less than you had budgeted for).  Then you’ll need to make immediate adjustments to your budget so you don’t overspend.

If you create a simple but efficient tracking plan you will find, after using your plan for a few weeks, that it becomes second-nature to jot down an expense as you make it.  

Save for Known Expenses

If you know that a big expense is coming up in a few months (a birthday gift for someone, a major anniversary or even a vacation) then you’ll want to start saving for it as soon as possible. Since you can’t count on consistent earnings, planning for big expenses becomes critical. Add a category to your budget for these savings and make sure you stick to this plan.

I have a series of simple savings accounts I use for my big expense planning.  Every month I transfer an amount into each account and over time I get to watch the accounts increase in size.  I can even configure each savings account to track how long it will take me to save up the amount I need for that special expense.  I find this very helpful and it keeps me on track!

Save for Emergencies

Unexpected expenses or a sudden loss of income can happen to any of us. That’s why it’s critical we all have an emergency fund created and growing in size month to month. However, if you’re earning a variable income, it’s even more crucial to create and cultivate this type of savings plan. A slow month of earnings or the loss of a big client could hurt financially and leave you struggling to balance your budget unless you have enough packed into your emergency savings fund to deal with the unexpected shortfall. 

Even an expense as simple as a vehicle repair can put a big dent in your bank account.  Most financial experts recommend those of us earning a variable income try to save a minimum of three to six months of expenses in that emergency fund. It can be done.  The best approach is to start slow and build the fund up over time until you have a comfortable cushion built.

Don’t Forget The CRA

Many of us who don’t earn a regular bi-weekly pay cheque probably don’t have income taxes being deducted from our pay.  This is very true for anyone who is self-employed or a gig worker.  If you generate these types of income you’ll be expected to pay taxes on the funds received later on.  And that means you’ll need to hold some of that money back and squirrel it away in another savings account earmarked for the CRA.  .I recommend subtracting 30% from every cheque you get for your work and putting that money aside. If you don’t end up needing it all for the taxman in the following year you can add the remainder to your emergency fund!