This week I’m following up on Chris’ article on budgeting. Chris and I have the same convictions regarding personal finance. However, what makes our families different is our pay schedule and method. Chris and Gretchen are similar to the majority of working Americans where their monthly income is fairly predictable. They know that a week of work = X dollars; X times 52 weeks in a year/12 months is a good target. (Some households stick to a rough estimate of 4 paychecks a month, and the months that have an extra Friday become a ‘bonus’ month).
Kelsi and I have what is called ‘An Irregular Income’—which makes budgeting very tricky. MANY families are in this boat with us, especially if you are commission/production based and/or self employed. My pay scale is commission/production based in a group environment; meaning as our production increases the group income increases, but as production increases the group size needs to increase to meet production needs. This means a lot of fluctuation and an unpredictable paycheck!
My median weekly income can (and does!) easily fluxuate 30% in either direction without notice. Four weeks with an unexpected 30% negative means our budget is short well over the same amount as a weekly paycheck! YIKES! Have that happen a few months and we’re in a real pickle!!!
These are practical tips on how to approach life with an irregular income:
First, Make a list of regular expenses you know of (ie. Tithing/Charitable giving, Rent/Mortgage, Utilities, Food, Gas, Car Insurance, Debt Payments, Birthdays/Holiday expenses), these are the needs that must be met every month and don’t fluxuate much in amount or due date.
I use a calendar and on every Friday have listed the expenses and bills I should expect for that week, once I pay a bill I cross it off. This is strictly a BILL CALENDAR – it’s NOT the family activity calendar that is stuck to my fridge.
Second, give yourself an allowance and make it a realistic set amount. Chris has a wonderful article on knowing the difference between a want and a need. Squeezing out a small amount of money that you can blow however you want helps keep you focused on the bigger picture. (Honestly, I personally don’t think this should be more than $5-$10 per week, it is just a little buffer for when gas jumps or you want a little snack—it’s a realistic cheat.) Much more than that and you have a license to deviate from your plan. The allowance isn’t mandatory during the months where there is a deficit, and should be the first thing CUT from the budget where income doesn’t allow for it. It is more to keep you in balance when you have four weeks when your paycheck has been fluctuating positively and all of the sudden you have a pile of cash sitting around and a whole list of ‘wants’ screaming in your ear!
Third, Savings, Savings, Savings. This most likely isn’t your retirement savings. Hopefully that is part of your regular monthly expenses; but you might not be there yet. That’s fine; you have to start somewhere. The sheer fact you made it this far in the article shows you actually care about your finances, good for you! You are already better off than most!
Set aside the rest of your money in savings. I brake this down into different categories. (1) Savings for when my checks are short. (2) Savings for emergencies. (3) Savings for a *want* (this again is a set/realistic amount to meet my emotional needs and help keep me from cheating on the plan when I have a surplus in my paychecks. Although I want to buy a few iPads today, I am only setting aside $20-$40 when I can so I can get one in 7-9 months). (4) Longer term savings for bigger ticketed items, like a new roof or a different vehicle, or for when my previous savings are wiped out and my checks are still short. This account should NEVER make it to $0! Just because I have enough to get a different car doesn’t mean I should spend it all on a different car. (5) Long term savings/investments. This shouldn’t have to be last, but honestly, I understand life happens. Just because you can’t put it in step #1 doesn’t mean you shouldn’t have it at the end either. Train your emotions to make it a priority. Instead of setting aside $40 for your iPad you can be excited to set aside $20 so you can put that other $20 into retirement.
Irregular income is extremely difficult to budget, and often times it is more of an emotional roller coaster than a financial one. It can be scary and confusing; you can feel wealthy one month and impoverished the next. The worst thing you can do with your finances is to have NO plan and just hope it all works out!
It really is possible to budget on an irregular income – and budget effectively and continuously – as long as you are strategic and disciplined.
What tips do you use to budget your irregular income?
This post was linked to Women Living Well Wednesdays at Women Living Well