How to Manage an Unpredictable Income

When your salary goes up and down, you need to plan ahead.

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For many people who rely on trading their time and energy for money to afford the necessities of life, the economy has caused an increased level of stress over the past few years. Even those of us with relatively secure jobs and incomes have been more concerned that this perceived security could vanish. I know many people who work for themselves, are consultants for hire, or are paid through commission, and they live with a level of uncertainty all the time.

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The less control you have over your salary from month to month, the more you should prepare for lean times. Consider these suggestions for managing an unpredictable income.

Beef up your high-yield savings account. While a common rule of thumb suggests maintaining an accessible savings account with a balance that could cover three to six months' living expenses, that might not be sufficient for someone whose income changes with the state of the economy, the whims of management, or any factor other than the amount of hours you work. Today, I see friends unemployed for two years. They're surviving thanks to the savings accounts they established. Anyone who is unsure about the amount of income they will receive over the next 30 days should have a much larger cash cushion.

Monitor your credit reports and scores. By maintaining a clean credit report and high credit score, you increase your chances of finding an affordable loan at a time when lenders are selective. During the credit crunch, banks and consumers were both affected by the recession; banks couldn't extend loans to anyone but the best customers at a time when more customers needed help. Check your three credit reports from AnnualCreditReport.com each year to ensure no incorrect information is listed. Use the resources offered by credit bureaus to monitor your credit scores. Practice good consumer behavior, such as paying bills on time, to ensure you are in the best position for receiving a loan you can afford when you most need it.

Keep a credit card available for emergencies. While cash back credit cards are the best options for people who never pay interest fees, the credit card you reserve for emergencies should offer the lowest interest rate. It's better to use your savings account if you find you cannot use your income to pay for your expenses, but sometimes that is not possible. For a price, a credit card can help you weather months with low income. The key is to pay the balance in full as soon as possible.

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Boost your human capital. Your human capital is your ability to earn income throughout the remainder of your life. By default and without any action to counteract this effect, as you age, the time you have left to earn income decreases. So does your human capital. You can increase your future earning power by increasing your depth of knowledge by taking more classes or training in your field or by increasing your breadth by exploring interests beyond your vocation.

Use the envelope budgeting system. The envelope budgeting system lets you set aside a certain amount of cash for a variety of categories, but has two interesting features. The system lets you carry over any money not spent until the next month. It also allows you to borrow from a future month's budget. This fits perfectly with unpredictable income. When your income is normal or higher than your expectation, you have the flexibility to spend or save in advance.

You may set goals for yourself that require growing your wealth over time. Reaching those goals will require building income either from working, investments, or both. But in periods of time when your income depends on external factors like the economy, you may be tempted to focus on preserving your money instead. By preparing for swings in income either as a result of a recession or the nature of your business, you will be in a better position to continue growing your wealth through stressful times.

Flexo encourages discussions about money and consumer issues at Consumerism Commentary, a premier blog focused on personal finance.