Whether you are a casual employee or self-employed, living on a variable income can feel like a constant case of one step forward two steps back.
For a long time my husband and I struggled with managing our cash and building up our savings because we are both self-employed and on variable incomes. Because we played it by ear and lacked a strategic approach to our money, it meant that we fell into a cycle of overspending on the good months and racking up debt on the bad months.
It took a bit of trial and error but eventually I found a system that worked!
If you are struggling to manage your bills on a variable income, following these few simple steps will take away the overwhelm and help you to go from debt to wealth.
Step 1. Know your numbers
If you are not a numbers person this will likely make you cringe but there is no getting away from it – in order to manage your money effectively you need to have a solid grasp of your average monthly living expenses. Fear not though, you don’t need to be a math wiz or spend hours pouring over complicated spreadsheets in order to get the job done. All you need to do is look up the ASIC Moneysmart Budget Planner – it is a simple online tool that will guide you through adding up your regular bills without the risk that you will forget something important.
Step 2. Identify your worst-case scenario
Next, take a look at the last 12 months of income on your bank statements and identify the minimum amount that is coming in consistently each month or fortnight. If, some months you have no income, and other months you get some income, then stick with zero as your baseline. This baseline figure is the one you need to use to plan your budget. When your income increases more consistently, you can go back and revise it.
Step 3. Bridge the gap
Now you need to check whether the consistent income from Step 2 covers the expenses from Step 1. If it does, move on to Step 4. If it doesn’t then you need to look at ways to bridge that gap. It can be by cutting back your expenses, generating extra income, or a combination of both.
Some ideas to help you bridge the gap are:
- Getting rid of non-essential expenses (at least in the short term). Streaming subscriptions, gym memberships, birthday parties, gifts, holidays, clothing, take-out, junk food, all needs to go. Just keep the bare minimum living expenses – for now.
- Shopping around for your regular bills like energy, insurances, phone to see if you can get a better deal
- Selling things you don’t need anymore like clothes or furniture
- Taking on some extra work where possible (the gig economy is your friend!)
- Subletting a room, garage or parking space
- Downsizing (could be your car or where you are renting)
Step 4 Automate your banking
Now that you have a good idea of your regular bills, automating will mean that you can stick to your budget, without needing to constantly track your spend. To do this, all you need to do is put all your bills on a direct debit payment plan – also known as bill smoothing.
These days, you can pay just about everything by direct debit, including utilities, rates and so on. So rather than paying your bills on a quarterly or yearly basis, arrange to pay them on a fortnightly or monthly basis (depending on how often you get paid). With minimal effort on your part, you will be able to avoid bill shock and know exactly how much money is left over for things like petrol, parking, groceries, clothes and dining out.
Step 5 – Get SMART
Once your regular bills are under control, it is time to decide what to do with the surplus cash during the good income months. Should you save? Or splurge? A good way to go about this is to start by setting some SMART goals. SMART goals are Specific, Measurable, Achievable, Realistic and Time-bound. Once you have a few goals in mind it is time to attach a dollar value to them and order them by priority. If on the good months there is enough surplus to direct towards all your goals, then go for it! And if not, then allocate the surplus cash by order of priority.
A great goal to start with is to build up your emergency savings buffer so you have money you can use to bridge the gap (Step 3) during low-income months or to cover any unexpected and urgent bills. Once that is taken care of, you can direct your attention towards other, more exciting, plans.
By implementing these five simple steps you will make sure that on the bad months you are at least not going financially backwards by getting into debt, meaning that on the good months you are free to direct the surplus cash towards your savings goals.
This article first appeared in Spa+Clinic Magazine.