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Rely on a variable income? Here’s how to chip away at debt

The gig economy can make life unpredictable.

Choncé Maddox

Contributing Writer at Tally

November 5, 2019

Having a variable income can seem like a blessing or a curse, depending on the circumstance. One one hand, you may have months when you earn more than expected or have a work arrangement that allows you to adopt a flexible schedule. 

On the other hand, your income can be difficult to predict, which makes it challenging to budget and make other financial decisions. Nearly 36% of Americans work in the gig economy, and the unpredictability is a major factor when it comes to paying off debt. 

If your income varies from month to month, you’re not alone. Whether you’re a server, freelancer, ride-share driver or salesperson working on commission, you can still pay off your debt in record time with the right strategies. 

Here are some tips to help you get started and make progress with your debt payoff. 

Set a realistic goal

Even if you’re not sure how much you can put toward your debt, it’s important to set a goal. If you don’t, you won’t have anything to aim for. 

Set a realistic goal of how much debt you’d like to pay off per month, 6 months or within a year. From there, you can start to work backward and see how much you’ll need to earn or where you can find savings in your budget to help you meet that goal. 

For example, if you’re a freelance graphic designer who wants to have an extra $500 to put toward debt each month, you can use this goal to motivate you throughout the month. Perhaps you can look for new clients, take on an extra design project, or add a new service (like rebranding or designing logos a la carte) to earn this additional amount. 

With a clear goal, you can actually track and measure your progress so you can make adjustments as you go.

Know your baseline

The key to reaching your financial goals with a variable income is to know your baseline. Your monthly baseline expenses, or “bare bones” budget, represent how much money you need to live comfortably for the month. 

Don’t include extra expenses and costs that you don’t need to survive like dining out, your gym membership or subscriptions. Just include the basics, like your:

  • Mortgage/rent

  • Utilities

  • Groceries

  • Insurance

  • Child care

  • Transportation

On average over the entire year, you should earn enough to cover your monthly baseline expenses, ideally a little more. This means anything extra that you earn is fair game. Add your goal debt payment for the month to your baseline expenses or share the remainder of your income between debt and other small wants. 

For example, if you’re a freelance photographer who brings in $3,000 per month after taxes and expenses, and your baseline expenses only add up to $2,000, that potentially leaves you with an extra $1,000 that you can use to pay off debt and cover additional expenses. During higher-earning months, you can put even more toward debt or save it for future months.

Either way, when you start with your baseline expenses, you can ensure that all your basic needs are met while revealing some additional income to put toward debt. 

Live on the previous month’s income

This is a budgeting method that works perfectly for anyone who has a variable income. Living on last month’s income is a safer way to manage your money, as opposed to living paycheck to paycheck. 

Instead of waiting on your next payment, you can live on the money you earned during the previous month. To get started, you will need to save at least one month’s worth of expenses so you can spend it during your initial month and save whatever you earn during that time to start using the following month. 

For example, if the current month is October, you’ll be living on money you earned and received in September. Everything you earn in October will just be set aside to use in November as you continue the cycle. 

By doing this, you always know exactly how much you have (because you’ve already earned it) regardless of what your income is. If you’re a freelancer and don’t get certain projects during one month, you won’t really be affected until you start planning your finances for the following month. By that time, you can go in with a solid game plan, whether that means slightly lowering debt payments, relying on savings or another solution.

Simplify your credit card payments

American households are facing an extreme debt emergency. Credit card debt is among the most common types, and the average household is facing a $5,700 balance. 

Credit card debt is often difficult to tackle due to high interest rates and the fact that it’s easy to apply for multiple cards and rack up balances. The last thing you want to worry about is making multiple credit card payments each month, in addition to tracking your variable income. 

Instead, consider consolidating your credit card debt to just one simple monthly payment. You may even be able to average out your interest rates and receive a lower interest rate overall, which could save you some money as well. 

Pay yourself first

Prioritize your debt payments even more when your income varies. Since you’re not counting on a guaranteed paycheck every two weeks, it’s best that you focus on paying yourself first. 

Generally, paying yourself first refers to allocating a specific amount of money to save first before you spend anything else. However, it could also relate to paying off your debt too. When you pay off debt, you’re gaining more freedom and financial stability as that balance shrinks and, ultimately, disappears. 

Not to mention, you can save money on interest by making extra payments, or paying more than the minimum on your credit card. This helps free up more money for the future. You can select a specific percentage of your income to put toward debt whenever you get paid. 

If you choose to set 20% aside one month and take home $4,000, that leaves you with $800, but if you bring home $3,000 that next month, 20% of that would be $600. Paying yourself first on a percentage basis is helpful with a variable income because your contributions can change as your income adjusts. At the end of the day, you’d still be putting money toward debt. 

Just get into the habit of making debt payments as soon as you get paid. Then, you can budget with the rest of your income during the remainder of the month.

Use windfalls and bonuses wisely

Extra money can go a long way when you’re paying off debt. Keep an eye out for windfalls and extra bonuses that you can either put in savings or toward debt. 

This can be anything from tips or a tax refund to client bonuses, performance bonuses or even credits from services you’ve used.

Having a fluctuating income means you need to save more than most people. You want to be prepared during those lower income months, in case you need to tap your savings. If you don’t have any savings to fall back on, this can result in you getting into deeper debt. 

It’s best to consider splitting your bonuses and windfalls between savings and debt payments until you have a solid cushion that you feel comfortable with. From there, you can just throw everything extra toward debt. 

Leverage your work situation

Focus on the benefits of variable income, as opposed to the drawbacks. Sure, you may not earn the same amount each month, but use that to your advantage when trying to pay down debt. 

You may have more control over how much you can earn. If you’re in sales, try revisiting old leads or a new marketing strategy to increase commissions. Consider picking up extra shifts, if you’re a server, so you can earn more tips.

If you’re an independent contractor, try to get more client work so you can put more toward debt. As a ride-share driver, you could start delivering food as well for extra cash. 

With a little extra effort, you may find that you’re able to earn enough to pay off your debt much faster than you would be able to with a traditional 9-to-5 job. 

Bottom line: Paying off debt is hard. Don’t let your income situation discourage you or become an obstacle. Instead, use your variable income as a tool to help you pay off your debt for good. Realize your plan may change, as the future is unpredictable. But with these clear strategies, you’ll set yourself up for success in the long run.