Does your income fluctuate? Here’s what to do
For everyone who’s got a side-hustle that relies on fluctuating passive income, works on commission, is self-employed, or earns an hourly wage, this article is for you.
Mastering your money when your income is bouncing up and down involves some math, and a healthy, balanced money psychology.
When times are good, it’s an opportunity to save more; which will hopefully tide you over when there are leaner moments in your cash flow (i.e. a slower sales month).
Step 1: Set up the right accounts
One of the biggest mistakes I see people on fluctuating incomes make is disorganization, which can lead to falling behind on key saving, investing and debt benchmarks we know lead to financial security and retirement readiness.
You’ll need:
One low-to-no fee chequing account for day-to-day banking (the place your fluctuating income gets deposited into)
One savings account for big-ticket items like foreseeable repairs or a 2022 vacation (this can also be the place your store your income tax money if you don’t have business accounts -- and yes, if you receive non-T4’d income, be prepared to pay taxes)
One savings account for emergencies
Tax-advantaged investment accounts (TFSA and RRSP)
Step 2: Follow the millionaire mindset for budgeting
This applies to all Canadians, but is particularly important if your income is irregular.
Budget using this framework:
Pay me first (5% towards savings - split between the two savings accounts suggested above - and 10% towards tax-advantaged investment plans for retirement)
Pay them (75% towards living and life expenses like housing, childcare, groceries and debt)
Spend the rest joyfully (10% towards WHATEVER makes you happy) -- joyful spending is linked to better mental health, less hoarding and debt
Underpinning this framework is putting each dollar to work so that you don’t have any money sitting around as left-over. If there is excess, save it or pay off debt.
Regardless of what your income is in a month, the proportions will largely remain the same. And, again, if you’re in a lean time, you’ll be so glad that you followed this mindset because you’ll have savings to cover off any temporary shortfalls.
Step 3: Pipeline it!
Line up your sales and income projections on a spreadsheet for the next six months. Then, project out your regular and one-off expenses for that same period of time. You can even organize your spreadsheet to align to the millionaire mindset - income, then savings and investments, followed by expenses and then joyful spending.
From this pipeline, you can start to see what your income and expense forecasts will be by month, and can take action if there is a rough financial patch approaching.
I get that projections aren’t reality until the money hits your bank account. BUT, they go a long way in the financial planning process by helping you be strategic about generating income and putting that hard-earned money to good use.
If you’re running short every month in your pipeline, there are only two ways to fix this; make more money or reduce expenses. The first can take some time - maybe you need to revamp your sales plan or get a second job. The second can happen quickly. Trim back non-essential expenses, renegotiate fixed costs and if you’re simply living well beyond your means, you’ll need to take a hard look at downsizing everything - house, car, clothing, kid costs and more.
This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.
