One of the most difficult challenges for families with fluctuating incomes is how to pay all their bills during the lean months. Income may fluctuate due to self-employment, earning commissions or tips, or working a seasonal job. People often turn to credit cards to supplement their income which only makes things worse since it often leads to debt.
To avoid new debt and live well on fluctuating income, it pays to take the time and effort to create a realistic spending and savings plan based on actual earnings. The following steps can help you get there…and may give you a sense of financial stability you find priceless!
1) Figure out how much money you earn
Look at your income over the past several months to find the average. For example, if you work seasonally, add up all your earnings plus your unemployment benefits over a full year. Then, divide by 12 to find your average monthly income. This is what you should be living on year-round, whether money is trickling or pouring in.
2) Create a household budget or spending plan
Add up all your monthly expenses including housing, transportation, food, and medical costs. Think about other expenses that come up throughout the year like insurance premiums, gifts, and real estate taxes. Divide those costs by 12 to find the monthly equivalents, and add these figures to your household budget. Then, save these amounts each month so you can pay the bills in full when they are due.
If you don’t know all your expenses or how much they cost, you have two options. First, you can track your spending going forward. Do so for at least 2 months to get a good idea of costs. Jot down every item you buy in a notebook, create a computer spreadsheet, or download an app to your smart phone.
Your second option is to reconstruct expenses by reviewing bank statements if you pay bills by debit card, writing checks, or through automatic withdrawals from your accounts.
3) Establish two savings accounts for “shortfalls” and “emergencies”
Shortfall savings will supplement your income during the months you come up short. When you earn more than the monthly average, save 2/3 of the extra and put it in this account instead of blowing it on something you want. You’ll be glad you did when you need to pay your heating bill next winter!
Put the last 1/3 in the emergency account. The idea is to be prepared for life’s “rainy days!” Having emergency savings will prevent building new debts from using credit when things go wrong. Then, use windfalls like tax refunds to boost both accounts.
4) Reduce spending/Increase income
When you still don’t have enough money to cover all the bills, you may need more extreme action. First, reduce spending by cutting expenses that are “wants” rather than “needs.” If you don’t need it to survive, it’s a want. For example, needs are food, housing, transportation, clothing, and medical care. (An expensive smartphone is a want for most folks.)
Then, look at ways to reduce your “needs.” For example, maybe you can carpool to work or use mass transit to save on gas and parking costs.
If budget cuts alone don’t do it, you may need a second job for more cash flow. Or, maybe you can find a better paying full-time job. Be sure to add in any new income to your existing monthly average.
If the numbers still don’t work, LSS can help you create a plan to gain financial stability. Call us at 888.577.2227 or GET STARTED ONLINE right now. It’s free, easy, and confidential. Don’t wait – take action today!
Author Barbara Miller with LSS is a Certified Financial Counselor and specializes in Bankruptcy Counseling and Education.