Financial Focus: How to Implement the 2-by-2 Formula with a Variable Income

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Just last week we shared with you our secret, 2-by-2 Formula we used to pay off over $100K of consumer debt in just seven years.  If you’re new to the 2-by-2 Formula or want a refresher, we encourage you to check out our post where we finally revealed our personal, 2-by-2 Formula that we developed and used to pay off our $100K debt in seven years.

To give you a quick refresher on what we are talking about, the 2-by-2 Formula states the following in regards to your income:

  • Establish your baseline income
  • Increase your income the first month by 2% over your baseline
  • Each subsequent months increase your income by 2% over the prior month’s actual income (remember that even if you missed your planned goal you just pick up from where you actually finished the prior month and make your goal 2% on top of that).

Note: We are only focusing on the income side of the 2-by-2 Formula in this article as it relates to the question at hand.  Don’t forget to check out the formula in whole where we also discuss decreasing spending as well.

With that, we receive a question a few times in comments and via email:

Question: How you can make the 2-by-2 Formula work for a family living on a variable income?  Isn’t that impossible on this plan?
Answer: Its honestly simple.  See why below!

To make it work with variable income, the first step is to calculate your average monthly income based off your variable income.

Average Income = Total Income / Number of months

Please note, don’t get stuck on this step as this is only used to establish your baseline and 2% of your amount honestly isn’t going to change that much.  After you establish your baseline income you’ll never use this amount again – throw it away for all we care!  You could use the last three months or even the last year – either way it will be ok as you’re only trying to establish a starting point.  We promise. :)

Your goal for the first month is then to increase your income by 2% of that baseline income.  For example, if your baseline income is $3,000 (after calculating your average income), then the 2% additional income you need to bring in that first month is $60.  It is this amount (the additional income) that you will want to make your goal for the first month.

Then at the end of each month identify that additional income directly resulting from the specific actions your family took to increase your income, whether through ideas of your own or maybe even one of our ideas from Over 100 Ways to Earn Extra income.  Whatever you track as that month’s actual, additional income is then increased the next month by 2%.  Seems easy, right?

Subsequent Month Additional Income Goal = Prior Month Actual * 1.02 (shortcut for 2% more)

So if your goal was $60 for the first month and you brought in only $55 of actual, additional income that first month, your next month’s goal would be as following:

Example: $55 actual income (goal was $60)
Next months goal: $55 * 1.02 = $56.10

All the sudden what seemed difficult at first becomes simple!  Your family should be able to identify the additional income resulting from your additional work. And all you need to do in applying our 2-by-2 Formula is increasing that income each month by 2% over the actual income from that prior month.

The goal here is to remember we are talking about making small changes each month that incrementally will add up to a large whole!  And when you realize that it will be much easier to see the forest instead of the trees.

If all this sounds too overwhelming:  If you honestly don’t want to calculate anything at all just use last months income, whatever it is and take 2% of that.  If that was your highest month, use your lowest month.  The key we want to emphasize is to just start somewhere!  Our goal is to help you find a starting place and work at improving each month in small, yet achievable ways.

Keep sharing your questions and thoughts as they really make this better for all of us.  And always remember that we want your questions and feedback.  We’ll be sharing more each week and would love to clarify as much as we can this 2-by-2 Formula.  Email us or leave a comment at the bottom of the post – we would love to hear your thoughts!

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