Allowances might not just be for kids… How to deal with lumpy income
The good old parenting trick of giving your kid a weekly or monthly allowance might not be only useful for kids. One month you’re splurging on Amazon and going out to nice dinners and the next month you’re having to go on a financially forced diet and tell your friends you can’t go out because you have no money. It’s not uncommon for many business owners and sales professionals to have extremely volatile incomes month to month. Here’s the secret… it’s all in your head.
If I have five grand in my checking account it’s going to be much easier to justify spending it versus only having twenty bucks left. I’ve found that even if that five grand is just in another account, just the three clicks required to transfer it is enough time for the guilt to build and dissuade me from transferring it and then spending it. This is the same psychological trick that many subscription emailers use. They make it just hard enough to unsubscribe that the majority of people don’t do it and continue getting the emails. Let’s use this to your advantage.
1. Establish one lifestyle
Some months you feel like the richest man in the world and others you are just barely scrapping by. This is not a healthy roller coaster for you or for your big picture financial situation. Find a happy medium and stick to it.
2. Build a budget
Figure out exactly what you would need to spend in that happy medium lifestyle every month. This figure should be between your highest and lowest earning months. There are plenty of budgeting apps out there to help you out or just get an Excel spread sheet going and write it all out. The goal is to figure out that number that you can live on every month, sustainably.
3. Pay yourself
Have all of your income come into one account and pay yourself the number that you found every single month regardless of the variations in your income. Some months you will have a big excess and other months you might have to draw on some of your reserve funds in that account.
4. Allocate excess
Once you get in the habit of paying yourself the same amount every month and it is sustainable, start to use the excess in your account to fund some of your other financial goals. This money will grow slow and steady. This excess could be used to fund retirement, buy a house, pay off student loans, or just be there as an emergency fund. Figuring out what to do with that excess completely depends on your individual situation. The key is having any sort of excess in the first place!
All summed up
Since you’re fortunate enough to be in a job that gives you the flexibility and uncapped income potential, you have to be a little more strategic with your money than the average person. One easy way to settle those ups and downs in your monthly income as mentioned above is to set up two separate accounts. Suppose you call it your savings and checking. Have all of your income flow into your savings account and then deposit one set amount every month into your checking account. That is your allowance that you are paying yourself every month so that you can finally smooth out that varied income.