How to manage debt on an unpredictable income
By Benjamin Salisbury
The debt charity StepChange has published figures that show the number of people who have contacted it in the first half of 2016 with debt problems has reached a record high of 300,000 with combined debts of £8.3bn. The most common type of debt is credit card debt, the charity found.
The charity said many of these clients are working, but many of them are self-employed, working part-time or have temporary or zero-hours contracts.
"One of the most prominent recent trends among the people we see is the rise in insecure work," Michael Agboh-Davison, debt default adviser at StepChange, said in an emailed response to questions. "The changing nature of the job market has seen more and more people in insecure work and this can make it difficult to budget."
This means they have to manage their finances with irregular money coming in battling with regular costs going out. The result is often debt problems and a struggle to manage cash flow.
out your average outgoings
The first thing you need to do is figure out your average outgoings. Gather all of your receipts, bank and credit card statements, then make a list your expenses, including regular outgoings, cash expenses, miscellaneous costs and seasonal costs.
Author account: How this author budgets on a fluctuating income
My method of choice is to try to plan ahead. I know how much my regular outgoings are and make sure I have enough to cover them, then I set aside earnings in advance of major irregular payments such as income tax, and car expenses such as MOT, tax and insurance.
I find that ensuring all my monthly direct debits go out on the same day means I only have to ensure the money is there on one day of the month.
If I have to find £500 to pay my annual car expenses on the 20th of the month and I have £560 left available on the 10th of the month, I'll take out the £60 and pay cash rather than using my debit card. That way, I won't touch the bank account; indeed, as a sort of psychological ploy, I'll even try and forget it exists.
It's not easy to do, but with the right amount of discipline and balance, plus a budget that never stays static, I manage to make it work.
Gather at least six months' worth of data. Add up your costs, then divide by six (or however many months you decided to use) to get your average outgoings.
Do the same with your income over the same period and compare the numbers.
If outgoings exceed income, decide what expenses to cut back on, whether it be nights out, hobbies or holidays.
"Be realistic," said Agboh-Davison. "Use previous years' figures to estimate costs. For someone with a varying income, base outgoings on a typical month, not a good month. This way, the good months will provide extra money to begin saving toward annual costs."
Whether your job has a "slow season" or you just sometimes have a "bad month", you're going to need to be able to work on a smaller income sometimes. The best way to cover earnings gaps is to save money when times are good, then use it when income is low.
Open an account specifically for this purpose. Deposit extra income into it during good months, and try to save up at least three months' worth of funds (based on your average monthly outgoings you've calculated). If you enjoy a few months of high income, don't be tempted to increase your outgoings unless you have that buffer zone.
Remember, your budget is an ongoing document, one that is constantly fluctuating and changing to match your lifestyle and outgoings.
"If you receive an unexpected windfall, use it to pay the highest-risk priority debts first, like the mortgage," said Agboh-Davison. "And for the self-employed, it is vital to keep personal and business banking separate."
And if you can possibly avoid it, make sure you don't rely on a credit card to bail you out in the lean months as this could end up costing more.
Finally, stick to your plan. Watch out for signs you are not sticking to your budget. For instance, you should not be living in luxury one month but searching down the back of the sofa for pennies the next. This suggests you are not managing your finances properly.
Published: 26 September 2016
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