Monday, October 5, 2009

Managing a variable income

On Mondays, we answer a question from a reader. Today's question deals with variable incomes. If you have a question, please post it in the comments section.

QUESTION: I would like to set up a household budget, but my income varies, from as low as $2,000 per month to as much as $10,000 per month. How do I set up a budget on a variable income?

ANSWER FROM DAN DANFORD: There are lots of people like that, and the best solution isn't budgeting. It's saving. Expenses aren't as variable as income. They are pretty predictable, actually. Groceries, electricity, rent or mortgage, and on, and on ... the expense side of budgeting is easy. Just add up your monthly expenses over a six-month period and divide by six. That should give you a fair idea of how much you need each month.

The trick with variable income, though, is covering expenses in the months where income falls short. To do that, you need a savings reserve. Over that same six month period, you should have enough good months to offset the bad. To succeed, you'll need to set aside extra when you have it.

This seems an elementary lesson, but many folks blow it. When the good months come along, they spend it all. And in the bad months, they use credit cards to cover. Eventually, they meet financial disaster.

My recommendation is to accumulate enough money to cover six-twelve months of expenses without any income at all. That should be enough to regulate the inflows/outflows and meet emergencies. This is the best way to manage variable income.

One last point. Don't kid yourself about income (or let your sales manager kid you about income). Sometimes, "variable" is a descriptive word used to hide ridiculously low wages. After a reasonable period of time where the variation is always low, find another job. Everyone deserves a living wage, and there are good jobs for qualified people. Don't let anyone hold you back with false promises!

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