Does your income change from month to month? While many Americans' wages fluctuate a little from period to period, those with large swings in earnings often find that financial planning is a real challenge. How can you make a success of preparing for the future and paying for your current life when income is hard to gauge? Here are five key steps to take.
1. Budget on a Baseline. Your monthly baseline is one of two things. It can either be the minimum income you receive, such as your salary without commissions, or it can be your minimum mandatory expenses. Working with a baseline ensures you can budget effectively for the necessities. Work with what's above the baseline as a separate set of calculations.
2. Create a Buffer. Anyone who has cyclical or irregular income needs a financial buffer against the unexpected. If the water heater breaks down during a low-earning month, you must have something from which to draw in order to fix it. The size of your cash buffer depends on things like whether there are two incomes in the household, what assets you have, and the types of emergencies you may deal with.
3. Pay Yourself First. The mantra to pay yourself first is never more important than when you have both high-earning months and low-earning months. By ensuring you contribute to future financial goals — such as retirement, vacations, an emergency fund, home repair funds, or investments — before you spend anything in a high-earning month, you make the best use of that extra money.
4. Take Money Out of Your Hands. Any time you receive a large check, the tendency is to spend more freely. This can be a problem when the next month may be much lower. One good solution is to remove yourself from the equation as much as possible. Use automatic transfers and auto-investing through financial institutions. Have transactions done by an outside party. Pay regular expenses automatically. Or create your own salary, leaving the overage in a separate account for later use.
5. Work With a Pro. When budgeting, minimizing taxes, and saving for future goals is more difficult, you need the help of qualified professionals even more. A financial planner has worked with clients in all types of income and expense situations, including yours. This makes them your best ally to smooth your income and ensure you make the best choices.
Want more tips for making a success of an irregular or fluctuating income? Start by meeting with a financial planner in your state today. With their help, you can plan for the future and be financially strong today.