How Couples Can Manage Money When Income Fluctuates

When you’re a married couple and your bills are steady but your income now isn’t because one of you has become self-employed, how can you manage your finances?

Here are six recommendations to keep your finances on track as one spouse takes on a new business or creative pursuit and moves to a more variable income:

1. Build up an emergency fund. Ideally, you’ll want to bulk up your savings before you leave your salaried job.

“If it’s a startup or business, you may not have income for awhile,” advises Anna Sergunina, a certified financial planner at MainStreet Financial Planning, in Burlingame, Calif. “Increasing the amount of emergency reserves is something to work on right away.”

Sergunina recommends increasing an emergency fund from six months to nine months of your monthly expenses before making the leap from a steady job to new work with a more variable income.

Doing so will help ensure that you don’t reach for your retirement cash by tapping into a 401 (k) plan or Individual Retirement Account, when you suddenly see gaps in your cash flow. “That’s a no-no. I would strongly advise against that,” Sergunina says.

2. Use two checking accounts. Sergunina also suggests using one checking account for fixed monthly expenses that must get paid each month and another for variable expenses, including discretionary spending that you can rein in if need be, during a less profitable month.

When earnings come in, designated amounts are then allocated to each account. The variable-expenses account should have a debit card for purchases.

“It’s just easier to manage,” says Sergunina. “Pay all your fixed bills with your fixed checking account. So if your income drops, then maybe your variable expenses need to be adjusted as well. but in the meantime, you still make sure you cover all your fixed costs.”

Incidentally, Serguninia also has a high-yield online savings account earmarked as “Curveball” — it’s an emergency fund to be used when life throws her curveballs, and can be linked to either of the two accounts. When the emergency arises, she transfers within 48 hours into one of the checking accounts.

3. Don’t forget about savings. Add savings, including retirement savings, into your “must-be paid” fixed expenses each month. View “savings” for short-, mid- and long-term goals as a “bill” which must be paid every month, just like the rest.

“It might be just a tiny bit,” Sergunina says. “Maybe you’re saving half compared to your salary job.”

4. Live on a “skinny” budget during the first year of a new business or project. After all, profits may be puny at first. “If you’re going to be overspending and living the high life, it’s not going to work,” Sergunina says.

Ask yourself, she adds, What’s my most bare minimum that I need to survive for six months to a year? “You want to give yourself time to figure (things) out,” says Sergunina.

5. Plan your budget monthly, not yearly. “Your line of sight to both income and expenses will be much better when you’re thinking a month ahead (versus, say, a year out),” advises Charlie Bolognino, founder and financial consultant at Side-by-Side Financial Planning in Plymouth, Minn.

“What I’ve found with clients is that planning cash flow a month out is action-oriented, ‘sticky,’ and sustainable.  Planning a year out tends to be theory,” he notes.

Bolognino recommends planning next month’s budget before the new month begins. First, look at income. “It’s much easier to anticipate what your income will be for next month than it is, say, for a whole year ahead,” says Bolognino.

Then, consider your expenses. “At the end of this month, spend time thinking about what next month looks like,” adds Bolognino. “What activities are going on? What do we anticipate buying?  What makes next month different than this month? How much will any of these things cost? Rough out a budget with those things to see how it all fits with projected income and adjust if necessary.”

6. Ease stress by downsizing. Before making a move to a more variable income, if possible, consider downsizing to a less expensive home. Doing so could lower or even eliminate a mortgage payment.

“Maybe potentially you buy something for cash, if you have enough equity. Renting is another option, because it’s cheaper and gives you flexibility to adjust in the future if the ramp-up phase of your business is going slower than expected,” Sergunina says. “That puts a little less stress on you, how much you need to make each month, starting a new opportunity.”

Remember: It will be difficult to qualify for a new mortgage or a refinancing once you leave a salary job behind. Lenders typically require two years of self-employment history before approving a mortgage, says Joseph Kelly, president of Arcloan. That’s why, if you want to downsize to a home with a mortgage, you need to do that before leaving your job so you can qualify.