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Last week, a number of you mentioned a major difficulty in setting up monthly household budgets: irregular incomes. What do you do when you’re self-employed and have a fluctuating income? What if you’re paid on commission? Or what if your income simply varies depending on the time of year?
I don’t pretend to think this is easy, but there are some solutions for you. I’d recommend trying them before brushing off budgeting all together. They may not be pure zero-based budgets, but pulling some ideas from these methods could morph into a custom zero-based hybrid budget for your family.
The “Live This Month on Last Month’s Money” Idea
Like Maureen suggested, you can employ the method of paying your current month’s expenses with last month’s income. In other words, you’d pay for the July phone bill with June’s paycheck. If you have an irregular income, this would give you a month’s leeway, and you could either find ways to supplement an upcoming month when finances are tight, or you could plan on simply living frugally for a month.
The obvious question to this, then, is how do you start? Because in that first month of trying this plan, you’ve got to have some money from somewhere. I know it can work, but I think you have to slowly work up to this system, saving a little each month until you have a month’s worth of expenses in savings ready for you.
The “60% Solution”
There’s also an idea called the 60% Solution. This was developed by Richard Jenkins at MSN Money, and in a nutshell, he advocates diving your gross monthly income as follows:
- 60% to committed expenses - everything from regular bills to clothing to giving.
- 10% to retirement
- 10% to irregular expenses - vacations, major purchases, and the like.
- 10% to long-term savings or debt - either one, depending on your situation.
- 10% towards fun - entertainment, hobbies, etc.
I suppose this could work for some people, but I don’t feel I can completely endorse this idea because of my firm conviction on being debt-free. If you’re in debt, I advocate doing everything you can to become debt-free, even if that means putting 50% of your income towards knocking it out (for a short time). But if you are debt-free, this budgeting idea could reasonably work for you.
If we had an irregular income, however, this is how I would budget.
The “How SimpleMom Would Budget if She Had an Irregular Income” Idea
• Category 1. Instead of starting with our income, like you do in a zero-based budget, I’d first list out our predictable, committed monthly expenses. This is stuff like rent, utilities, and groceries. This is not stuff like dining out, entertainment, or vacation. Ask yourself, what do you absolutely have to pay for in order to survive? Those are the items to list here.
• Category 2. I’d then list out our more irregular annual expenses (such as Christmas, or sometimes auto insurance), divide them by 12, and use that number as our monthly expense for that category.
• Category 3. Then, I’d list our monthly “fun” expenses, like dining out, hobbies, or entertainment, and decide how much we want to spend on this month.
• Category 4. Finally, I’d list our nice-but-unnecessary expenses (like if we’re saving for a new couch), add up the total amount we want saved, and divide by 12.
Category 1 is our necessary expenses, and that total amount should go into everyday our checking account. Categories 2, 3, and 4 would then fall into separate checking or savings accounts, dog-eared for their specific purpose (sinking funds, in other words).
Our goal would be to fully fund Category 1 each month. After that, with this plan, you decide based on your situation which other categories fall in order of importance. So if it were us, I’d then fund Category 2, then 3, and finally 4.
This is when the beautiful magic of ING Direct accounts come into play - you can have an unlimited amount of accounts, label them for their specific purpose, and have money automatically drafted into each account.
I’ll play this out with our token family. The McSimples made $3,000 in June, but only $2,300 in July.
The McSimple’s Typical Monthly Expenses:
- C1 - giving: $100
- C1 - rent: $1,000
- C1 - utilities: $300
- C1 - groceries: $500
- C1 - gas: $100
- C1 - other monthly bills: $200
- C2 - auto insurance: $50
- C2 - Christmas: $50
- C2 - gifts: $100
- C3 - entertainment: $200
- C3 - stamp collecting: $100
- C4 - vacation: $200
- C4 - saving for a new couch: $100
TOTAL = $3,000
For June, The McSimples could fully fund all four categories, but in July, they could only fund Category 1 and part of Category 2. Though not ideal, it’s okay, because Category 1 is what they need for survival.
This idea works well following the Baby Steps. For example, if you were on Baby Step 2 and working on becoming debt-free, anything but C1 and C2 would go to the Debt Snowball. If you’re working on fully-funding your savings with 3-6 months of expenses, as in Baby Step 3, then I’d say anything past C3 goes into your Emergency Fund.
For more reading on how to handle irregular paychecks, My Dollar Plan has some good ideas.
Now I’m just a mom here, not a financial expert. Does anyone else have ideas? Have you had personal success budgeting on an irregular income? Let’s give those Simple Mom readers with unpredictable incomes some ideas! I’m convinced that everyone is able to responsibly steward all the money that comes their way, no matter how often it’s given to them.
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{ 15 comments… read them below or add one }
I’m going to work through the “holding account” scenario described in your link to My Dollar Plan and see how that works out for us. Part of my problem is that I’ve been keeping our household expenses and hubby’s business expenses intermingled. Today I worked on clearly defining the two entities. Now I have a clear grasp of how much the household needs to survive and how much the business needs to survive. It clarifies the goal of how much hubby needs to earn in order for home and business to stay in the black.
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I think you’ve hit the nail on the head. The non-discretionary items MUST be taken care of before anything else.
The only other thing I would suggest is to ensure that you do Baby Step 1: Make a $1,000 emergency fund. While not strictly it’s purpose, I think if you’re on an irregular income this could be used as a buffer for the times when bills are more than usual or your income is much lower than expected. For example your gas bill might be a bit higher than usual because of a cold snap or something.
Journeyers last blog post..10 Great Standby Recipes
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@Jill - I’ve heard from small business owners that it makes a world of difference to have two separate accounts for personal and business. Yeah, the holding account scenario was a new one for me, too - sounds interesting, though. Let me know if you try it!
@Journeyer - Well said. Another reason why the idea works well with the Baby Steps!
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One way we’ve adapted to an irregular income is by making our basic $1000 emergency fund into a $1000 emergency fund and $2000 budget shortfall fund - that way when our income doesn’t fit the budget for a particular month we simply pull it out of the budget shortfall fund and then the next months top priority, after essentials, is to replenish that shortfall fund
Blesseds last blog post..What’s For Dinner?
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One of the things newcomers to fluctuating income have to deal with is the urge to spend money when you have it. DON’T.
Fluctuating incomes often means fluctuating *spending*. Keep your spending habits at an average rate, regardless of what’s coming it. Doesn’t matter what you call the excess during more solvent times. Resist the urge to spend it on things you’ve “gone without” just to “treat” yourself.
I live in an area where lobster fishermen can earn a full year’s income in a few months. But then that’s it. The danger is forgetting it has to last all year, not just four months.
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My husband is a self-employed contractor. It’s feast or famine. Thankfully, the last few years have been feast. However, the feast brought us out of a not just a famine, but a severe famine. I think we were in denial as to how bad it was . Anyway, during that severe famine for the first time in his 13 years of being in business, we were unable to draw a paycheck. For 3 weeks we had no pay. It was a real eye opener for us, and you learn real quick what is *necessary* and what is not! I cried many times during those days, but the lessons I learned were invaluable! With the rising costs of it seems everything, I’m again considering more carefully what is a need and what is a want.
Kats last blog post..Behold the Krispy Kreme Doughnut!
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You had some great ideas in this post. Luckily we have a fixed paycheck, so our budget is pretty cut and dry. But, if we ever go to an irregular income, I’ll remember these ideas. One thing my parents always taught me, is to put 10 percent of my income aside in savings. This advice has been invaluable for those times when we have unexpected expenses arise.
Koris last blog post..Turkey Roast
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@Blessed - I like that idea! I guess you just have to make sure you have plenty in your shortfall fund, and replenish when it goes down, like you said.
@Andrea - Well said!
@Kat - Sounds like you learned invaluable lessons there. God truly does care about our character-building!
@Kori - 10% is always a good rule of thumb. It’s longstanding advice for a reason, I guess!
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This is exactly what I’d been hoping for. I think the “live this month on last month’s paycheck” would probably work best for us, but you’re right — saving up to start will take us some time. But I also live every day with the belief that I am growing “wealthier and wealthier every day in every way”, so this system will help us to grow while still maintaining a solid budget system that stops us from overspending when we have a earn more than we did the month before.
Jennae @ Green Your Decors last blog post..No time for green shopping? Kanibal Home will find your vintage treasures for you
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This is the situation the husband and I are in, we have a irregular income. Only one part of our income do we know the exact amount for each month. His shifts constantly change as well as his hours. He may work 40 hours for three weeks of the month, then the last week he may work 45 (5 hours of over time) or 30. It is very difficult to budget on an irregular income, that is why we pay our rent with what we know is the secured income, what will not change.
I really like your category idea and may have to try and implement that into my budgeting.
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@ Jill: Simple Mom is right, keeping the business and personal accounts separate will help a lot!
My Dollar Plans last blog post..Selling Your Life, Careers, Housing, and More
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This is completely off topic, but wanted to let you know anyway - I received my amazon.com order today with my Dave Ramsey books in it! After reading all you posts on money management, I couldn’t wait to buy the books and get started straight away… BUT I had to wait for Amazon to deliver my books all the way to Australia for that
July is going to be a huge month for our little family! With these books and the Pear Budget (it’s awesome - so simple!) I can’t wait to begin our new financial year on a budgeting high :o)
Thanks for all your inspiration and more importantly, motivation!
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@Meegan - That’s not off-topic at all! I’m so happy for you and your family! Thanks for your kind words.
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My husband is in Graduate School, and so on a tight, irregular budget I’ve found a build-up budget to be invaluable. It’s like a zero based budget, but I add up all the necessaries, like rent, utilities, food, tithing (0r giving, as you put it), etc, and then based on how much we usually have I assign the rest. If our utilities are a little under budget, I automatically save that amount (along with food, or any other variable expense), and so a buffer builds up for when we have a month with less income. This isn’t part of our long term savings, but rather a small predictable-need fund. Because our income is variable, but not by huge amounts, this smooths every month over.
Thoras last blog post..A Two Bedroom Townhouse Apartment of My Own
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Great post, fabulous advice. As a good amount of your readers, we are dealing with fluctuating income as well. We bought our home right before the housing market tumbled and have been struggling ever since. My husband is ex-military turned car-salesman and when he first started a few years ago he would bring home nice paychecks. We were able to put away money into savings and used it for our down payment. I quit college (again) to bring in some money for our new expenses (eg. home insurance, larger utility bills) but was laid off this past February and haven’t been able to get a job ever since. We nearly lost our home, not having been able to make the mortgage payments, until our finance company renegotiated our mortgage. That was two months ago, today, with my husband now bringing home paychecks around $200 each week, we can barely keep afloat. The car business has gone dead, jobs are hard to come by and me being a permanent residence has not aided in my job search either. Tears are rolling down my face reading your and your readers’ advice, not having a way of implementing them is heartbreaking.
Thank you though for being a beacon of light, thank you for all your advice, tips and encouragement you offer on your website. I’m a newbie to your site and am going through your posts one by one, taking babysteps in applying your techniques to our life. Keep up the great work you do.
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