6 Tips for navigating income volatility

It's challenging to pay bills on time and save money without a stable income. Learn six tips for navigating income volatility to control your finances.

Lee Huffman
September 26, 2023

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While many workers have consistent paychecks, others cannot count on the same income every week. When you don’t know how much your next paycheck is, it can be challenging to make ends meet, stay current with bills, and save for the future. Learn more about income volatility, how it affects your finances, and how to recession-proof your finances.

What is income volatility?

Income volatility is when you do not have a steady paycheck that you can count on. People affected by income volatility include those with hourly positions, who work on commission, gig workers, seasonal workers, those who work for tips, and the self-employed.

Depending on your profession, the fluctuations in your income could be based on how many hours you work, economic conditions, or other variables. In other words, the volatility may be based on your effort or factors beyond your control. For example, if you work at a restaurant at a ski resort, your income would typically go up in the winter and shrink during the off-season.

Many workers have stable, fixed incomes that don’t change each paycheck. These workers may be salaried employees or hourly workers with a consistent schedule. Volatile incomes vary each pay period due to variable hours, different income opportunities, level of effort, and other factors. Seasonality in your business, economic conditions, and competition may also impact how much money you can make.

Alternatively, you can be susceptible to fixed income volatility if you live on a fixed income and have a tight budget with little to no way to increase your cash flow. In this scenario, you would likely have to take on debt to cover expenses if any emergencies occur.   

The impact of income volatility on financial stability

Income volatility can have major negative consequences on your finances and your mental health. When you don’t have enough income to pay your living expenses, it can lead to increased debt, missed payments, late fees and higher interest rates. Increased utilization on your credit cards and missed payments can also impact your credit score. All of these factors can have negative effects on your mental health, which can lead to medical problems, doctor bills and inability to work effectively.

Having an emergency fund provides a safety net when you earn less than you need each month. It helps you stay current with your bills and cover unexpected expenses that can wreck a budget. One rule of thumb is to have three to six months of income set aside in high-yield savings accounts. For people with volatile incomes, it is a good idea to have an even larger emergency fund.

On top of the immediate stress of variable monthly incomes, there is the potential for long-term financial impacts. A missed payment that goes 30, 60 or 90 days late can stay on your credit report for up to seven years. These late payments can lead to high-interest debts, late fees, and a damaged credit score. Bad credit can cause a domino effect with the inability to get approved for loans in the future or being required to pay higher rates and fees.

Identifying if your income is volatile

If you’re unsure whether you suffer from income volatility or have a stable income, analyze your finances. Start by looking at your paycheck stubs and bank statements from the past 12 months. In some cases, you want to review the last two to three years.

Use a spreadsheet or a piece of paper to write down your monthly income or deposits for that time period. Is your income relatively consistent or does it fluctuate more than 20% each month? Can you determine what caused the fluctuations, and is there something that you can do about it?

In some cases, there isn’t anything you can do about income volatility. You may have chosen a profession where a stable income isn’t the norm. There may be external factors that you cannot control or influence. For example, you can’t stop economic downturns or make it snow at the ski resort during the summer.


6 Tips to navigate income volatility

There are many ways to mitigate the impacts of income volatility. By diversifying your income streams, reducing your living expenses or taking other approaches, you’ll take control of your personal finances and reach your money goals.

Create a financial buffer

When your income is volatile, it helps to create a financial buffer in your finances. A financial buffer is also known as your disposable income, which is the difference between your income and required monthly obligations. By reducing your monthly living expenses, you can increase your financial buffer. Having a large financial buffer makes it easier to pay your monthly bills on time, even as your income fluctuates.

To increase your financial buffer, review your monthly expenses to see where you can save money. Here are a few steps you can take:

  • Moving to lower-cost housing or taking on a roommate reduces your housing costs.
  • Cutting cable, shopping your phone plan around and canceling unused subscriptions saves money.
  • Refinancing your mortgage, auto loan and student loans lowers your debt payments.
  • Using a consolidation loan or balance transfer offer reduces or eliminates credit card interest.
  • Selling your car and using public transportation, biking or walking eliminates loan payments, plus it gets rid of auto insurance, gas, and maintenance expenses.

Budget for income volatility

While you cannot always control your income, you can take charge of your finances. Understanding what your living expenses are and budgeting around them helps you know how much money you need each month. When you have high-income months, setting aside money to cover those expenses is a good idea. Some banks allow customers to create multiple savings accounts without extra fees, with each one dedicated to different expenses, income months, or goals.

Diversify income streams

When you have a volatile income, you can reduce that volatility by diversifying your income. Adding extra sources of income can help you create a financial buffer and smooth out those fluctuations. For example, if you have a job that is seasonal, adding a second job that peaks in the off-season can provide a stable income to plan your expenses and savings goals around.

You can also add extra income by investing in rental properties, starting a side hustle, or earning dividends from the stock market.

Reduce debt and financial obligations

Debt can be looked at as using today's income to pay off yesterday's purchases. Making extra payments to reduce or eliminate debt frees up extra money every month. Reducing debt helps your personal finances in two major ways – interest and cash flow.

As you pay off your debt more quickly, you'll pay less interest on the money borrowed. When the loan is paid off, you've eliminated a monthly debt obligation and increased your financial buffer. Extra payments work differently with revolving debt like credit cards and lines of credit. As you pay down the balance, you pay less in interest, and minimum monthly payments go down. Plus, you create more available credit, which can be used in an emergency.

Invest in skill development and career growth

Many workers suffer from income volatility because they don't have enough experience or education to qualify for jobs that offer a stable income. By investing in your education, you can earn a degree, certification, or skillset that qualifies you to make more money or get hired for a different job.

Getting the right qualifications matters. Review job postings for positions you want and see what degrees, certifications, and experience hiring managers are looking for. Compare those requirements against your education and experience to determine what your gaps are. Focus your efforts to address those gaps in your resume to increase your chances of getting hired. Use your spare time at night, on weekends, and in the off-season to go to school, take online courses or take an internship. Consider attending industry conferences to make connections with hiring managers and leaders at companies you're interested in.

Create a contingency plan

If your personal finances are in danger, you may need to create a contingency plan for your debts and living expenses. You'll do this by prioritizing which payments are most critical versus others that you'll pay later. While you may pay late fees and higher interest charges on late payments, certain bills have to take precedence. For example, you may prioritize rent, utilities, and car payments over credit card debt because you need a place to live and a ride to work.

A more extensive contingency plan may include more drastic measures, such as:

  • Tapping into your home equity to pay off higher interest debt.
  • Canceling your apartment lease early and moving in with friends or family.
  • Turning in your car and taking public transportation.
  • Speaking with a credit counselor and entering into a debt repayment plan.
  • Selling assets to settle debts with creditors at a discount.

Final thoughts

Income volatility can make it challenging to pay bills on time and save for your future. You can recession-proof your finances by diversifying your income streams, reducing high-interest debts, and getting control of your living expenses. Educating yourself and learning new skills can also lead to higher wages and more stable income.

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