For the last 15 years my income has fluctuated. It could have broken me. It could have caused me to rely on credit cards or family to bail me out on bad months. But that didn’t happen. And there’s only one reason why not. I paid myself a salary. Instead of living with the highs and lows, I created my own version of a steady income. It’s the best thing I could have done for my financial life.
A lot of people live on commission or variable income. Waiters, waitresses, artists, realtors, salespeople, the list goes on. This is a huge group of people who regularly lose confidence when they have a bad month. This up and down lifestyle is tough to recover from.
The best way to manage this income is to take a look backwards at your last three months. Don’t forget to include your spouse’s income if applicable. Average out your income over this time period. Then take a look at your fixed expenses, how much do you have to bring in each month to meet your obligations?
Once you determine what your income need is, compare it to your average income. If you aren’t making as much as you need you’ll have to consider alternative income sources. Otherwise, begin to pay yourself the amount you need to live each month and put the rest into savings. When you have a bad month withdraw the difference from your savings account. Each month your income will be the same and your financial life will even out because the ups and downs will be cushioned by your savings. And not to be dramatic, but it will probably change your life.
Often people in this situation compare it to hitting a moving target, but I think what’s actually happening is the target is fixed. You just don’t know how many arrows you have. By paying yourself a salary each month you guarantee that you have the exact amount of arrows you need.
I discussed this concept on Fox 59 recently; check out the video below to get more details on how you can smooth out your financial life when you have a less than ideal income situation.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.