Pennies

Budgeting On A Fluctuating Income

Let’s face it, life is tough and is always throwing us punches. No matter how stable and secure we may think we are, at any given moment everything can change at the drop of a hat.

Whether it’s an emergency home repair, health issue or job loss, everyone should have some sort of emergency savings to cover these unanticipated costly events.

In sales, most of us are on a highly variable income. We are typically compensated by a base salary plus commission which may be paid out monthly, quarterly or only annually. Some sales positions are 100% commission. Being on a variable income makes it significantly more challenging to save, however it’s not impossible. Here are some tips that will help you get started:

ANALYZE YOUR INCOME AND IDENTIFY THE MONTH WITH YOUR LOWEST EARNINGS (AFTER TAX)

A quick way to figure out this number, is to simply look at your base salary and ignore commissions. If you make monthly commission, look at the previous year and identify your lowest month and use that as your figure. If you are on 100% commission, identify your lowest month and if that is zero, look at the frequency of your sales and you may have to develop a quarterly budget.

CREATE A BUDGET BASED ON THAT NUMBER

Identify all of your current spending to have an idea of where you are at. Firstly, begin with your non-variable income (i.e. mortgage/rent, property tax, utilities, etc) and then your variable income (everything else ranging from food, entertainment, travel, etc). Don’t forget all the small stuff that adds up like subscriptions, gifts, clothing, gym membership etc. Be sure to include absolutely everything you can possibly think of because this is where you will be able to make some cut-backs. Add up all of your variable and non-variable income separately and combined.  Then compare it to your lowest earning month and deduct that figure from your expenses. What kind of deficit are you running? Where can you cut back? Can you be shopping for basic necessities elsewhere to save money?

PAY OFF HIGH INTEREST DEBT FIRST

With some high interest debt, you may actually end up spending more money paying off interest than your actual debt. If you can obtain a line of credit from your bank, usually those rates are significantly lower than credit cards and other debtors and you can use those to pay off your higher interest debt in the interim and then work towards paying off the line of credit.

UPON PAYING OFF DEBT, AUTOMATICALLY TRANSFER THE SAME AMOUNT INTO A SAVINGS ACCOUNT

This is where I was able to save most of my money. I had a car loan that was $750 per month. As soon as I paid it off, I set up the exact same amount of money to be automatically transferred to my savings account each month. After all, I was used to that amount being withdrawn from my bank account each month, so why stop now?

SET UP A TIERED SAVINGS PLAN

I have a variety of savings accounts, all of which have a different purpose and I use them in this precise order:

  1. Chequing account – A basic account I use to pay all of my bills.
  2. Savings account (low interest) – First line of savings which I use for mostly home repairs or vacation.
  3. High Interest Savings Account – Backup – Only withdraw funds if regular savings account is low.
  4. TFSA (Tax Free Savings Account) – This is similar to an investment account. Only accessed in case of emergency.
  5. Mutual Funds – Investment only accessed if all other accounts are limited which would be an extreme emergency.
  6. Line of Credit – Absolute last resort.

INVEST IN RRSPS

Very commonly in sales positions where we may be taxed at the rate of our base salary and not at a higher rate once commissions are included, we may end up not paying enough taxes and owe taxes back. In this case or if you anticipate that you may be earning less money the next year, then you should consider investing in RRSP’s. This will reduce your overall taxable income. The only disadvantage is that once you invest in RRSP’s, this money is no longer liquid.  Therefore if you plan on needing access to this cash, it may be better to simply pay taxes and keep your money in savings.

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