I’m a Financial Planner: 9 Ways To Manage Money When Your Income Level Changes

Managing your money seems relatively simple when you know you can count on the same amount of income each month. When money fluctuates, however, decisions can feel much harder.

Read Next: I’m A Self-Made Millionaire: 6 Steps I Took To Become Rich On an Average Salary

For You: 9 Easy Ways To Grow Your Wealth in 2024

How much should you save or invest? Which debt should you focus on paying off first? What’s your budget for eating out or entertainment? All of these are valid questions when you’re unsure of how much you’re making.

GOBankingRates spoke with Abid Salahi, finance expert and co-founder of FinlyWealth , to discuss how income changes — whether positive or negative — require thoughtful financial adjustments. Here’s how to navigate these shifts effectively.

Money mistakes the super wealthy never make - that you might be doing now.

When Income Decreases

Reassess Your Budget

Salahi advised to immediately review your expenses. Categorize them into essential and non-essential. Look for areas to cut back without compromising your quality of life. “The first step is to gain a clear picture of your new financial reality,” he explained.

List all your expenses and rank them by necessity. He said this process often reveals spending habits you weren’t fully aware of. “I had a client who realized they were spending $300 monthly on subscriptions they rarely used. Cutting these immediately freed up funds for more critical needs.”

Consider This: Passive Income Expert: Here’s How I Make $27,000 Every Week

Build or Bolster Your Emergency Fund

If you haven’t already, start an emergency fund. Aim for 3-6 months of living expenses.

“An emergency fund is your financial safety net,” said Salahi. “If your income has decreased, try to set aside even small amounts regularly. One effective strategy is to ‘pay yourself first’ — treat your emergency fund contribution as a non-negotiable expense, just like rent or utilities.”

Explore Additional Income Sources

Salahi highly recommended considering part-time work, freelancing or selling items you no longer need. Diversifying your income streams can provide financial stability during uncertain times.

“I advise clients to leverage their skills or hobbies. For instance, a teacher client of mine started online tutoring, which not only supplemented her income but also opened up new career opportunities.”

Negotiate Bills and Debt

Contact creditors to discuss payment plans or hardship programs.

“Many companies offer flexibility if you’re proactive,” Salahi added. “One client saved $150 monthly by negotiating with their cable and phone providers and transferring high-interest credit card debt to a 0% introductory APR card.”

When Income Increases

Resist Lifestyle Inflation

Salahi advised maintaining your current lifestyle for a few months before making any significant changes. “It’s tempting to immediately upgrade your lifestyle when your income increases,” he explained. “However, I advise clients to wait at least three months before making any major changes.”

This allows you to thoughtfully plan how to allocate the additional funds and avoid impulsive decisions.

Increase Your Savings Rate

Another crucial tip from Salahi is to use this time to boost your retirement contributions and other savings goals. “If your income increases by 20%, try to increase your savings by at least 10%.”

This strategy, he noted, allows you to enjoy some benefits of your increased income while significantly improving your long-term financial health.

Pay Down High-Interest Debt

Use extra funds to accelerate debt repayment, focusing on high-interest debts first.

“Paying off high-interest debt is one of the best investments you can make,” said Salahi. “A client who received a $10,000 bonus used it to pay off credit card debt with 18% APR. This decision saved them over $1,800 in interest over the year and improved their credit score by 50 points.”

Invest in Yourself

This is a big one. Salahi recommended considering using some funds for education or skills development to further your career.

“Investing in yourself can lead to even greater income potential. One client used her raise to fund an advanced certification in her field. Within a year, this led to a promotion that doubled her initial raise.”

Rebalance Your Investment Portfolio

As your income and savings increase, Salahi advises ensuring your investment strategy aligns with your new financial situation. “Higher income often means you can take on more investment risk for potentially greater returns.”

However, he said this should be balanced with your overall financial goals and risk tolerance. “Regular portfolio rebalancing is crucial to maintain an appropriate risk level as your financial situation evolves.”

The Bottom Line

Overall, regardless of whether income increases or decreases, Salahi believes maintaining clear financial communication with your partner or family is crucial.

“Regular ‘money meetings’ can help ensure everyone is on the same page and working towards common financial goals,” he said. “Remember, income changes are often temporary. Developing adaptable financial habits and maintaining a long-term perspective will serve you well through various financial seasons.”

This article originally appeared on GOBankingRates.com : I’m a Financial Planner: 9 Ways To Manage Money When Your Income Level Changes