By Daniel Rodriguez | Dr. Budgets
Do you have variable income? Maybe you have variable income because you are in sales and earn a commission. Or, maybe you own a business and your income fluctuates month-to-month. Regardless of why you have variable income, your income isn’t fixed like someone employed in a salaried position. This situation is great when the big commission checks are rolling in or when business is going well, but what happens when income is less than average during the month? What do you do in that situation?
If you have variable income, frequently income will be higher in some months than others. For some people, this can create a feast or famine lifestyle, which can be very stressful. The simple solution that has worked for me and many of my clients over the years is this… give yourself a fixed “salary.” How do you do that?
First, open a separate checking account to deposit all your “business income” (I will use this term throughout this post, but it also applies to variable commission checks). If you are in sales, that is where your commission checks will be deposited and the account you will use to pay for any sales-related expenses (reimbursable or not). If you are a business owner, this is where your business-related income and expenses will flow through.
Next, take an average of your business income minus expenses over the past year, then divide that number by 12. It is important to create a business budget and track your business income and expenses to get an accurate figure for this, but if you are unsure, take your best guess for this step. As an example, let’s say your total income minus expenses the past 12 months looked like this:
| January – $10,000 | July – $5,000 |
| February – $5,000 | August – $10,000 |
| March – $10,000 | September – $15,000 |
| April – $15,000 | October – $0 |
| May – $25,000 | November – $5,000 |
| June – $0 | December – $20,000 |
So, in this example, your average monthly income is $10,000 ($120,000 divided by 12).
Next, if taxes aren’t taken out of this figure, subtract a certain percentage for taxes (consult with your tax professional to determine this amount). In our example, we will use 25%, so $2,500/month for taxes.So, in this example, your average monthly income is $10,000 ($120,000 divided by 12).
Finally, take the amount that is remaining and use a figure lower than this as your fixed “salary.” This is how much you will transfer to your personal checking account every month. Let’s say $7,000/month in our example ($10,000 minus $2,500 for taxes minus a $500 buffer).
Now that you have this figure, you can create a personal spending plan. If you can’t balance your personal budget, then you will need to go back to your business budget to determine what you can do (either increase income and/or decrease expenses) to get it to balance.
In real life, things don’t always work out as neatly as this example. When you first set up this system, you may have some lower income months (let’s say you started in June in our example), so you won’t have the business reserves to draw upon to get you through. If that happens, do the best you can, but don’t give up! When the big income month does happen, use that to build up your business reserves. You can then pay yourself your full fixed “salary” during that month, and hopefully, during the next lean month(s).
This is a simple system that has worked for many of my clients, but it will take some effort to set it up, and then to keep up with it (invariably, you will “need” to spend a bunch of money right when your big income month happens!). But if you work the system, the system will work for you. If you know someone who needs guidance with variable income, have them set up a complimentary consultation today to see how we can help.