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Living on a variable income is no easy task. No matter your profession, if it’s commission-based in some way, you’ve probably struggled with the challenges of having a variable income.
I know I have.
When I first started budgeting, it took me a while to figure out how my ever-changing paychecks fit into the equation. It’s not easy to plan when you can’t consistently count on earning the same amount each month. How do you know what to live on when it’s always different?
However, just because it’s more complicated, doesn’t mean you can’t do it. After many years of trial and error, I figured out some tips that make living on a variable income much more manageable. Check them out below to stop sweating over your changing paychecks!
What Amount Should I Live On?
One of the toughest things to figure out at first is how much you should let yourself spend each month when you don’t know how much you’ll be earning.
Maybe you’ll have a great month and allow yourself a nice dinner a few times that month. You may have a terrible month, can barely pay your bills, and have no extra funds for anything discretionary. How do you even begin to plan for that?
1. Stick to Your Base Salary
Some variable income jobs have a guaranteed minimum salary, and your employer awards you additional pay based on your commissions. If this is how you’re compensated, then I’m jealous. This is a beautiful set-up!
You know you won’t make less than your base salary each month. You already know your “worst-case scenario.” Each month the least you can make is that base, and everything else will only make your check larger.
Budget based on your guaranteed minimum salary and don’t plan to spend more than that each month. Anything above the base is lagniappe that you aren’t relying on to support your lifestyle.
2. Look at 6 to 12 Months of Old Paychecks
Unfortunately, not every commission-based job offers a guaranteed minimum salary. Some are paid entirely on commission. You can show up to work every day and work hard, but if you don’t earn any commission, your paycheck is $0.
In this situation, it’s much harder to predict your income and know what you can spend.
If you’ve been at your variable income job for a while, you can look back at six to twelve months of old paychecks. If you prefer, go back further and look at more than twelve, but I find a year’s worth of paychecks to be more than enough.
Now, locate the paycheck with the smallest dollar amount, your worst-earning month. This is the amount you’ll live off of each month. You know, most likely, you won’t make less than that.
Another question to ask yourself: Is this still representative of your income now? Maybe something changed in your workplace, and your earnings are drastically different from what they were last year.
If so, or if you’re about to start a new commission-based position, the next tip is for you.
3. Track Your Commissions for Several Months
If you’ve had a downturn in business or are beginning at a new company, looking back at old paychecks probably won’t do you much good. You can look at them if you’d like, however, your situation now holds more uncertainty than before.
In this case, you should track your commissions for several months, and live on as little as possible in the meantime.
The first few months at a new variable income job can be financially unpredictable, especially when the position is commission-only. It’s essential to track your commissions closely and limit spending when you have no base salary. You could literally make $0, or you could make thousands of dollars.
It would help if you took a few months to gauge what you won’t earn less than. And it’s best to be extremely frugal while you’re figuring that out in case the take-home isn’t as much as you’d hoped for.
Prepare to Withstand a Slow Month
If you have a variable income, there will be times you make less. As much as you try to estimate your “worst-case scenario” paycheck, there may be a month when you earn even less.
Besides correctly determining the amount you should live on, you also need to prepare to withstand a slow month(s).
Mentally prepare yourself and create a financial plan to handle this. Seeing a “bad month’s” paycheck can induce immediate anxiety and financial stress. However, recognizing that this is no failure on your part and having a plan in place will significantly relieve your stress when the day comes. And it will come, believe me.
Preparing for a slow month is a process. It takes time to develop and implement a plan to get through a period of lesser income. So don’t feel overwhelmed if you think you aren’t ready to weather a low-income slump.
4. Cut Expenses on Short Notice
A very effective way to compensate for a sudden drop in income is to cut your expenses on short notice. The sooner you foresee the income dip, the better because you can start taking action faster.
Trim discretionary expenses to almost nothing by finding free entertainment, halting take-out runs, and purchasing only the necessities. Limit your groceries to the bare-bones ingredients and don’t buy any snack foods. Skip a month on any monthly subscriptions you have.
These are just a few examples; it’ll be different for everyone. Find the expenses you can quickly cut out if you needed to.
I know this sounds like a lot, but I’m suggesting temporary measures for extreme circumstances. Once your pay normalizes, you can go back to living on what you usually do.
However, if and when your earnings drastically take a nose-dive, you’ll be glad you prepared and already know what you can instantly cut out to relieve financial pressures.
5. Build a Cash Cushion
Having a variable income means uncertainty. Buffer that risk with a Rainy Day or, as I call it, an Emergency Fund. This is especially important if you’re planning to make a job change, and you can’t be sure what your new commission-based income will look like.
Building yourself a significant cash cushion will help you withstand the decreased income when times are slow. Some people (myself included) can feel a little anxious when they see their Emergency Fund start dropping. But that’s why it’s there, to have your back when your income can’t cover the bills.
It’ll take time and patience to save up the amount you need in your Emergency Fund to feel secure. Start with a small goal, build on that, and you’ll have savings that can support you for months before you know it.
Develop these Crucial Money Habits
6. Bank your Windfall Months
With a variable income job, you’ll have months when you make less and months where you earn what feels like a windfall. It’s easy to look at your lucrative months, start getting excited, and plan all the fun ways you’re going to spend that money.
Don’t splurge on lifestyle inflation just because you did well one month. Don’t buy an expensive car, or plan a $5K vacation. Save the excess! Banking windfall months can go a long way to helping you build your cash cushion that you’ll be glad to have when the slow months arrive.
7. Don't Rely on Future Earnings
With commission-based employment, there are moments when you can see a busy time approaching. Certain conditions look right, or you catch wind of industry news that makes it seem like you’re about to get slammed at work and see the hefty paycheck that accompanies it.
Then circumstances change, and maybe it’s not as busy as you thought. You don’t end up having the killer paycheck you expected.
You want to be careful during these times not to spend or obligate money you think you’re about to get. Don’t spend more because you anticipate a good month. If you’re wrong, you now can’t afford the thing you just bought.
Don’t count on money that’s not already in your account.
Soften the Impact of your Variable Income
8. Have Multiple Sources of Income
The more sources of income you have, the less financially strained you’ll be if you have a month where your primary job earns you less.
Whether you own rental properties, sell a product or service online, or have another business on the side, the more income streams you have, the less you’ll worry when one dips.
Multiple sources of income take time to build. Start small and begin trying to add a second source of income besides your primary, variable-income job.
It takes patience and dedication to create something outside of your nine to five. It isn’t for everyone, but if you think it may be for you, this could be an excellent method to soften the impact your variable income has on your monthly finances.
9. Try You Need a Budget (YNAB) Budgeting Software
Although I don’t use You Need a Budget (YNAB) budgeting software, it has raving reviews as an excellent option for people with variable incomes. YNAB is unique because it bases your monthly budget on what you earned the month before.
Best Features. YNAB makes the question, “What will I earn this month?” a little less problematic. You don’t have to worry about your current earnings affecting this month’s spending. You already know what you made last month, and that’s what you’re living on now.
Every dollar has a role to play. Each dollar you earned from the previous month must be assigned a purpose, whether it’ll be put into savings, used to pay for groceries, or pay for your gym membership. Giving every dollar a specific job means it’s harder for money to fall through the cracks.
Something to Consider. You have to save up a month’s worth of expenses before you can implement this budgeting software. This process is very achievable (in fact, saving several months’ income is what you should do with your Emergency Fund). However, it is something to consider if you’re thinking about using YNAB.
For example, say it takes you three months to save up a month’s expenses. You’ve finally got it and are ready to start this new budget system.
How it Works. In month #1 of using YNAB, you’re living on the money it took you three months to save. During this month, you’re setting aside everything you earn to use next month. In month #2, you pay all your expenses with month #1’s paycheck while saving month #2’s checks for later use. And so on.
Different systems work for different people. If you think YNAB could make living on a variable income easier, check it out here!
If you’ve felt uncertain living on a variable income or confused about how to budget with an ever-changing paycheck, you’re not the only one.
Variable income jobs come with a lot of uncertainty, and uncertainty brings stress. However, they can also give you high earning power. The sky’s the limit with commission-based employment, but there can also be low lows.
Follow these tips today to negate the lows and take most of the stress out of living on a variable income. Now that you’ve figured out living on a variable income, sign up below to join my Budget Basics Challenge and figure out how to set up the remainder of your budget.