Surviving, and Thriving, on a Fluctuating Income

Business DeskAs a full-time freelance writer, my income resembles the peaks and valleys of the Rocky Mountains. I have months where I’m flooded with cash, and others where I’m scrambling to find work.

Yes, it’s the glamorous world of commercial writing.

If you’re like me and live on a fluctuating income, then you know how hard it can be to manage your money. How can you possibly create a budget when your income may swing 50% or more from month to month? How do you plan your savings when you have no idea what you’ll be earning next week?

I’ve lived on a fluctuating income for almost 6 years now and it was a huge challenge at first, so I wanted to share some of my own tips and tricks for managing a changing income:

1. Create a Cushion

I’m putting the most important tip first because my entire system rests on one thing: having an “income cushion.”

Having extra money set aside for the lean times is absolutely vital when you live on a fluctuating income. This extra money should be separate from your emergency fund.

To build this cushion, you need to be disciplined. If you have a successful month, you can’t go blow it all on a trip to Greece or a new HDTV. You need to put some of it in your emergency fund, and some in your “cushion fund.”

For instance, if you usually earn around $5,000 per month and you end up making $6,000 one month, put $500 in your emergency fund and$500 in your cushion account. Keep adding to your these funds whenever you have excess money each month, or even leftover money.

I keep my extra money right in my checking account, but many people find it helpful to have a separate savings account for this extra money. Either way, if you find that money burns a hole in your pocket, it’s especially important that you sock it away into another account to reduce the temptation to spend it.

How much you ultimately decide to save up is entirely up to you and your comfort level. I have two month’s living expenses in my cushion. But again, this is not my emergency fund. It’s vital you keep these two separate!

2. Create a Budget

It took me a while to figure out how to create a budget on my income.

Here’s what to do:

1) Add up all of your monthly bills. By bills, I mean anything you have to pay in order to survive (e.g. rent/mortgage, utilities, food).

2) Add up any bills that you pay quarterly or yearly, and divide that number by four (for quarterly) and twelve (for yearly). I have found to be extremely helpful here.

3) Add up the totals from the first two steps, and this is the amount of money you need each month to get by. These are your “Must Have” expenses.

4) Add up your “Wants.” These are expenses like going out to eat, going to the movies, vacation savings, and gifts. These are the “nice-to-have” expenses, but ones that you can live without if necessary. To calculate this number, just get a rough estimate of what you normally spend in an average month on your “Wants.”

5) Take a look at your income from the past few years. Figure out what you bring in every month, on average. Then, take off 10%-20%. By being conservative, this will help you avoid running out of money during the leaner months. I personally knock off 20% of my income when creating my budget.

6) You’re now left with a low estimate of what you earn every month. You also have two categories of expenses: the “Must Haves” and the “Wants.” Your “Must Haves” represent what you have to earn at a bare minimum. These are the obligations that are non-negotiable. Your “Wants,” on the other hand, do not necessarily need to be fully funded since you can go without these. Your ultimate goal should be to fully fund your “Must Haves” each month, ideally with money left over to at least partially, if not fully, fund your “Wants” as well.

7) If you’re self-employed, don’t forget to budget for your quarterly taxes! These should be kept in a business savings account until they’re due.

3. Reduce Expenses

The fewer expenses you have, the less money you must have to get by every month.

If you haven’t already done so, take a look at the “extras” in your budget. This could be your cable TV, magazine subscriptions, or expensive monthly trips to the hair salon. What could you trim away?

For me, reducing my expenses has eliminated a lot of stress from my life. For example, I’ve eliminated the TV from my household. Because I need less to get by each month, I am less worried about my income.

4. Create Additional Income

Working as a freelance writer is completely unpredictable, which is why I try to have several streams of revenue coming in during the month.

What could you do to easily add some passive income for yourself? Some ideas are:

  • Write and sell an e-book.
  • Start an eBay business.
  • Sell used books on Amazon.
  • Buy a cheap home as rental property.

Last Word…

If you work on commission or are a freelance or contract worker like I am, then you know all too well the “monthly scramble and stress” that can go along with your unpredictable income. This is why budgeting and planning is so important! Yes it can be a chore, but when you start to experience that sense of stability which is the end result, you’ll be glad you put the time in.

Do you have any other tips for surviving on a fluctuating income?

  • Sally Aquire

    Great advice. Things have been so much simpler on that front since I set up my “buffer/overflow” account that I can dip into if I’ve had a lean month so I definitely second that tip!

  • Heather Levin

    @Sally- I know…life would be really stressful sometimes without a buffer. I have a friend that owns her own business, and when she has a windfall month she splurges on treats for herself. And when she’s down next month, it’s a scramble to make ends meet. No thanks!

    • Sally Aquire

      That doesn’t seem like the best plan, especially if she happened to earn next to nothing the next month! Sounds like you need to direct her towards this post!

  • Heather Levin

    @Sally- I know, I’ve tried talking to her about it. She’s a shopper though, and feels that when she makes big one month she deserves to spend it on herself. So, I’ve stopped bringing it up!

    • Kira

      The “I deserve this” mindset is a dangerous trap. Do you deserve a new coat more than you deserve not stressing next month because you don’t have the money to pay the gas bill?

  • Ramona

    Excellent ideas. I am also a freelancer (web design) and have faced the “feast/famine cycle” myself. Now I try NOT to spend all the money on useless junk, even if I make more than before and be careful with my budget. Not to mention that some money saved is always a good way to sleep better at nights :D