The Disadvantages of Variable Pay

Variable pay, or a less-than-predictable income stream, has the potential to derail budgeting and financial planning and make it tough to stay on fiscal track. This can lead to a host of financial consequences that can harm your credit score and make it challenging to live within your means.

When you’re unsure of the amount of your next paycheck, it can be difficult to make a household budget and stick to it. According to author and financial expert Dave Ramsey, host of "The Dave Ramsey Show," this can be problematic for people who work on a freelance basis, such as writers, or on a commission structure, such as salespeople. To be fiscally responsible, you'll need to estimate earnings and allocate a certain percentage of each paycheck to specific bills to make sure you're covered in lean times.

People with variable income streams may find it challenging to secure credit, particularly for big-ticket items such as mortgages or auto loans. Potential creditors may question your ability to repay debt in a timely and consistent fashion. You may face higher-than-average requirements for down payments or live with low starting credit lines until you establish a track record for on-time payment.

If you get into debt, it can be difficult to climb out when you live on a variable income. If you get behind on revolving debt, you may be subject to late fees, penalties and higher interest rates, all of which can compound a bad situation and make your monthly payments even higher than anticipated. This can create a vicious cycle and damage your credit rating.

Even if you allocate savings as a part of your regular budgeting, when you come up short one month because of your variable pay structure, it can be easy to dismiss savings as a nonessential luxury. This can make it difficult to save money, plan retirement or finance things like vacations, education or major purchases.

According to Money Crashers, living on a variable income can put you at a disadvantage when it comes to financial emergencies. If your car breaks down or you have a medical emergency, you can't count on your next payday to cover the costs when you don’t know when that will be or how much you will earn. Creating a financial cushion for unanticipated needs is vital.

According to Science Daily, financial worries can cause other forms of stress in your daily life. You may be concerned about supporting yourself or your family, meeting all of your financial obligations or planning for the future. A qualified financial planner or credit counselor can help you find workable solutions to living with and managing your finances on a variable income.