Budgeting for Irregular Income
March 21st, 2008 by Ana
OK, enough opining for this week. How about a useful post? One of the common “excuses” for not doing a budget is “I never know how much money I am going to make/bring home because I am not on a set income.” Bah! (Fiddlesticks!) That excuse is just weak! If you work on commission or tips you can still make a budget. Irregular income is no excuse, you still need a battle plan for your money.
While most of our household income is fixed (about 75% of it) I still bring home some irregular income because I work on tips. I still need a plan for what to do with that money, or it ends up burning a hole in my pocket and “disappearing” like unbudgeted money usually does.
When you don’t have a guaranteed income level, you need to shift to a prioritized spending plan, where you list out your expenses in the order of importance. If you have no fixed income, then your entire budget is a list of spending priorities:
- Food: should always come first! This is grocery money, not restaurant money, with the absolute bare minimum amount listed.
- Housing/shelter/utilities: You need a roof over your head and your heat and electricity and water to stay on.
- Transportation: this is where the vehicle notes, driving insurance, and gas money if you have those expenses, or a bus pass if you use public transportation. Everyone needs a method of getting to work and back.
- Necessary clothing: Clothing required for work or growing children, and you should probably budget the bare minimum and put “wants” further down the list.
- Insurance: health, life, and disability insurances are all part of a good financial plan.
- Minimum payments for debts (if owed): Down here is where you put the minimum payments for things like credit cards, NOT above housing!! I have never understood why some folks will pay their credit card bills before buying groceries or paying their rent/mortgage.
- Discretionary spending: HERE is where all the fun stuff should be … below all of the necessities. This is where eating out money and vacation spending and fun stuff belongs.
OK, so what happens when you run out of money before you run out of list items? You draw a line where the money runs out. Anything below that line doesn’t get paid.
Dave Ramsey tells a very humorous story of when that happened to him, and he got a collection call for some company “below the line.” The collector was quite shocked when Dave Ramsey explained he couldn’t pay that bill “because you’re below the line,” and what that meant. The collector (who had been exceptionally rude at the beginning of the call) asked how he could get above the line. Dave Ramsey quipped, “You be nicer when you call,” and hung up.
It’s a humorous story (especially with him doing the different voices) but it illustrates a very important concept. When you make your priotized spending list, you do not deviate just because someone is trying to bully you! The priority list is set in stone, unless an emergency comes up and YOU make the decision to change it.
In fact, with the prioritized spending list, you can break it up by pay period to better control where your money is going. This is often easier to do than a monthly budget. This gives you a plan of exactly where your money should go before you get paid, even if you are not sure how much you will bring home. If it’s a really really great pay period, and you run out of list items before you run out of money, what to do then? Rather than blow it on fun stuff, I would recommend starting on the next pay period’s list or put it into savings as a cushion for when you have a bad pay period. But that one will be up to you. After all, it is still YOUR money.
Posted in budgeting |
March 21st, 2008 at 9:42 am
For budgeting when most of your income is fixed and a small % (less than half) is irregular (I am in this position too) I think this could work.
But for truly irregular income, I think the plan needs more svaings and structure built in for the “good” months. Truly irregular means you could make zero one month. Then nothing gets paid.
March 21st, 2008 at 9:56 am
PaidTwice, yes there really should be some savings (I think I do mention that) but I have learned there will be some folks who refuse to believe bad things can happen. Maybe I’m just cynical today LOL
March 21st, 2008 at 3:46 pm
The only set amount of money I receive in a month is the GI Bill… everything else is irregular. It was a nightmare adjusting to, especially since I was used to the twice a month military pay system! But basically, I ended up putting MYSELF on a 1st and 15th pay cycle.
I save up everything from the 15th till the 30-31st, then deposit it all on the first. That is the money I have to work with until the 15th. Since the GI Bill comes in around the 7th, the 1st part of the month is where I have the most money available to pay things. I pay as much as I can, which means even if the electric bill is not due until the 27th, I still pay it with the money I have the first part of the month.
Now, from the 1st until the 14th, I save everything, and then deposit it on the 15th. Thats what I have to work with for the second part of the month.
Yes, I have a buffer zone in my checkings account in case I do not make what I project. However, I have been working in tip based employment at the SAME place for 10 months now, and have good historical records of what I usually make in a 2 week period. I low ball my projections on the budget. I usually make more than I project, anything could happen that could keep me from doing that. (Like when I got ran over by a wheelchair and did not work for 2 of my scheduled days!) Even with that, I still met my projection, so I was in no immediate threat of not being able to pay a bill.
This system, in my opinion, just takes some discipline. After doing it for 3 months, I feel it was the best choice I could make, because I am actually following my budget and I know at all times how much money I actually *have*. Not once since I started doing this have I received a bill and said to myself, “How am I going to pay this!” Actually, with this system, I have found that I have more to pay towards debts because I am actually *watching* every penny!
March 22nd, 2008 at 2:12 am
I’m contracted/self employed. Here’s the line items on my spreadsheet, condensed for brevity
1. giving
2. food
3. shelter, utils, etc
4. clothing
5. 5~6 month savings
6. auto’s
7. other bills like cable, piano lessons, etc.
8. blow
the rest gets jumbled depending on what we are paying off/saving up for.
If we are in paying down our house mode that gets the next chunk.
If we are saving for a home improvement/trip/etc that gets it.
5~6 Savings comes early because that particular account is what we pull from when I’m off contract or I didn’t bill enough that month. so we are always bouncing between step 2 and 6
it’s great though. we always have money in savings, money to spend and money to splurge.
the first month trying to get the $1k EF was horrible. but since then it’s been great. Sometimes we get lazy and don’t do things in the right order. But we’ve been 10 years on this plan and it’s worked out great. Even bought a used Jaguar for cash 3 years ago. that was a bit Dave inspired though.
March 22nd, 2008 at 2:24 am
I forgot to add something.
It’s not easy, like I said we get lazy.
It’s not hard during the slow times when there is little work. the budget is king then.
It’s hard during the good times. It can be like “O’Boy now we can get this, this and this done” instead of remembering that maybe the next contract period won’t be so great.
A few celebratory dinners, doodads for the kids and wife and then it’s wake up time.
All in all it’s way better that when i got a paychecks that never got a chance to dry before they were gone.
March 23rd, 2008 at 8:30 am
[…] Budgeting for Irregular Income offers up some great ideas for setting up a budget when earning income on an irregular schedule (commissions, part time work, etc.). (@DebtFREE-Revolution) […]
May 4th, 2008 at 7:32 pm
My husband and I have a very irregular income and we have been having a hard time paying for things. Granted, my husband barely had any work in the last 2yrs. It’s just starting to come back now. He is a self-employed framer. We have been trying to figure out for the longest time how to budget w/ scarce or barely there wages. One month he might have a frame and we scurry to pay everything we can that has been neglected for the past couple of months because he only had a couple of decks he built or something. We can’t even keep up with our utilities ourselves.
How do we budget when it’s soooo feast or famine for several months and then we’re so far behind?
I also am surprised you say to ignore the credit card bills? We basically have been on survival mode for the last couple of yrs. and didn’t really have a choice but to pay for just food and gas. Now, we’re facing court trials and arrest w/ the credit card company for non-pymnt??
We have been doing this-
1. food-groceries,kids lunches for school
2. car and gas,insurance
3. mortgage
4. credit cards- if there is any left even??
We are 2 months behind on pretty much everything how do you catch up??
Thank you in advance for your advice