Personal finance Q&A #2: dealing with income ups and downs

Q&A #2:

Q: I’m struggling with managing my money. I’m self-employed and my income varies every month. When I work regularly, I make plenty of money to pay my expenses and pay down my debts, but the months I don’t work as much as I’d like to, I struggle to make my money last until my next job.

A: This is a really common problem among people who are self-employed or contract employees, and who don’t have consistent income. Some months you’re swimming in cash, and others you’re barely keeping your head above water. If you’re making enough money to pay all your bills over the long-term, it’s easy enough. My recommendation would be to deposit all of your income in a savings account and then automatically transfer into your checking account the amount you need to pay your bills either bi-weekly or monthly. You’re essentially giving yourself a salary. The months that you’re making extra will serve to pad your savings account; and you can dip into that savings cushion during those months that your income doesn’t cover your expenses. So if your expenses total $2,000 per month, set up an automatic transfer from your savings to your checking of $1,000 twice a month (or whatever schedule works for you). That will give you more consistent income to cover your regular expenses and will also help you to increase your savings account. Hopefully over time, your savings cushion will grow to more than you need; at that point, you can take the excess and either pay down some debt or put it towards a savings goal.