The Financial Decisions That Get Harder When Your Income Changes

A change in your monthly income sounds pretty simple on paper. Whether you’re getting a raise or your company is cutting hours, making more or less money looks like it would be easy to manage, but that’s not always the case. Income changes impact finances in a variety of ways, and some of them are much easier to manage than others.

Getting a raise might make a larger monthly payment technically affordable without making it a good idea to immediately build your lifestyle around that increase in income. A temporary reduction in your hours creates the opposite problem, because you may be able to maintain your current spending for a while, but you may not want to assume that you can do that forever.

Find out more about how to manage changing income so you can protect your long-term financial health.

Deciding How Much Of A Raise To Spend

A raise creates a unique situation. You have more money to spend, but you don’t have to spend all of it. Whether you get an annual raise from your job or change jobs, making financial decisions after a raise isn’t just about making more money so you can spend more money. That approach leads to lifestyle inflation, which happens when you spend more because you’re making more.

A useful approach is to give the raise several jobs. Some of it can increase your spending, some can go toward savings or investing, and some can be used to pay down debt or build financial flexibility. You don't need to choose between enjoying the raise and being responsible with it.

Deciding What To Do With A Bonus

Unlike a raise, bonuses provide a one-time income boost. In the same way that receiving a financial gift doesn’t offer consistent financial benefits, bonuses aren’t the secret to improving your long-term financial health. Instead, they can be valuable tools when viewed through the correct lens.

Irregular income budgeting is a difficult concept for many people to get a handle on. A $5,000 bonus that hits your account once a year should not be treated the same way as a $400 per month increase in your earnings. However, splitting up a bonus might be the best way to maximize its benefits, which is also the case with a raise.

One way to handle an unplanned influx of cash is to treat it separately from your recurring budget. You might use part of a bonus for something you've been putting off, direct part toward savings or debt, and keep some available for future expenses.

Deciding What To Do With Irregular Income

More people are picking up side hustles than ever before. However, most secondary jobs don’t provide the consistent income that comes from regular work. Contracting and freelancing have never been more popular, but if you don’t have a plan for what to do with that money, you run the risk of spending it without much thought.

When your income changes from month to month, your highest-earning month can make your finances look healthier than they really are. A few unusually good months can make a more expensive lifestyle feel reasonable right before a slower period arrives. If you’re supplementing your income with a side gig, consider putting the money generated by the side hustle in a separate account. This can allow you to better monitor how you’re using it.

What About an Income Loss?

Not all temporary changes in income are positive. Even if you’re a full-time employee, your employer may decide to reduce your hours in an effort to cut costs. Something as seemingly small as going from 40 hours per week to 35 can add up over the course of a month. 20 fewer hours per month comes to 240 fewer hours per year. If you’re making $25 per hour, that’s a loss of $6,000 per year.

Managing changing income isn’t always about deciding what to do with more money. Sometimes, it requires you to figure out how to live on less. If you’re dealing with a decrease in income, you have options. Consider picking up a supplemental income source. If that’s not feasible, find some lines in your budget that can be trimmed back or eliminated. It doesn’t have to be permanent, but getting through a tough time is sometimes as simple as cutting back.

Managing changing income isn’t easy, but it is possible. With some financial discipline and a clear plan for every dollar, you can maximize the benefits of an increase or weather a loss of income.

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