Managing Irregular Income

[Gina3123]

Hi,
I was wondering how you guys plan for irregular income? My SO and I are saving hard but I'm struggling to work out what to do about his income. I am a spreadsheet nut, I get off on setting ourselves goals etc. My income is regular each month, his can vary wildly between nothing and five times what I earn, with very little time to forecast what is coming up.

I'm wondering If the best solution would be to cover all our expenses with my income and then all of his can go into savings? But that makes it difficult to do any kind of robust planning.whilst he is agreed with the mmm way, I always think he's very present and thinks mostly of the day he's on right now and I'm the planner.

I mean, as far as problems go, it's not a biggie but I was wondering if anyone had any top tips?

What do you guys do in this situation?

Thanks!

[AZDude]

Obviously living off just your income would be ideal, with saving his. As far as budgeting, just average it out and budget that much with a bigger than normal checking account balance to keep things smooth during the lean months.

[NoStacheOhio]

If you can pay for everything on one income, then that's pretty straightforward. Carrying a higher checking balance is another simple solution.

If that won't work for you, you could try depositing his checks into a separate account, then setting up an automatic deposit every month for his "paycheck."

[yakamashii]

Do you have debt? Do you have enough cash on hand for emergencies?

If No and Yes, managing irregular income is exceedingly simple, provided you understand your spending, as MMM advocates.

You won't meet defined monthly savings goals because of the fluctuations, but you already know that. Prepare for months where NW decreases, and months where it skyrockets. (Last time I checked this for myself, my NW decreased in 34 out of 78 months; the magnitude of the positive months far outweighed that of the negative months)

With debt and emergencies covered, it's mostly mental.

[terran]

I'm wondering If the best solution would be to cover all our expenses with my income and then all of his can go into savings? But that makes it difficult to do any kind of robust planning.

This is what we do with my irregular income and my wife's regular income. If we needed my income for expenses I would probably set up an "income replacement" fund and probably take 1/12 or 1/6 of it every month or something so at least I would have some warning if some belt tightening was going to be needed.

[2Birds1Stone]

As someone who likes math, why not figure out the average income based on annual or bi-annual numbers? I know it will be far from 100% accurate but better than guessing moving forward.

[dess1313]

if its 0 to 5x what you make its harder.  mine varies, but never goes down to less than 40-60%

1.  Build a cash cushion to ride through your bad months.  sounds like you'll need at least 2 or 3 months of cash, depending on how bad these down times are and how long they last.  If you hit a dead zone, then you use the reserve.  if you have a flush month, then you build the reserve.  pick an amount that if you're over it, then its safe to spend, or invest
2. try to see if your income can cover the essentials, home, food, heat.  have their income do the investing, as well as the 'nice to have' things
3. try to stay a month ahead on your bills.  your final paycheck will cover the next month's basics.  it requires a decent cash cushion to do this, but keeps things less tight when bigger bills come cycling through and the paystub is a week away

What sort of debt, loans, and other big commitments do you have monthly?

http://gailvazoxlade.com/blog/archives/97
http://www.metronews.ca/views/my-money-gail-vaz-oxlade/2016/03/13/abcs-of-budgeting-for-variable-income.html

[couponvan]

We have regular base incomes, but DH get a large variable bonus at points throughout the year (and it can range from 0-60% of his ANNUAL income). 

I did SAHM for 6 years, and budgeting was interesting.  I did a monthly budget averaging the last 3 years' bonuses and dividing that by the number of months I a year.  The average of the bonus went into our "luxury" budget items.  Our "basic" budget was based on his regular base salary only.  When he got a bonus, if it was higher than average, we invested it.  If it was lower than average, we reviewed the "luxury" budget items and stopped them for the next year. If he didn't get a bonus, well there were no luxuries! (Actually, he's always gotten some bonus, but we're conservative.)

One year he thought he might get no bonus due to the bad economy, and were worried about layoffs as well.  I went back to work part-time.  He got a "small" bonus that year anyway and kept his job too!  I've continued to work - and we use my salary (after childcare costs) to increase investments and make extra principal payments. Every year I work is 1 year less he has to work for FIRE. :-)

Since it sounds like you could afford the "basic" budget on your salary alone, you could try budgeting that way.  Let about 3 months of boyfriend's salary accumulate in an emergency account as a cushion for unusual months.  Then going forward, only spend 1/12 of the average of his last 3 year's earnings on "luxury" budget items (this include budgets for saving and investing, but please make sure investments/savings are in a joint account since he isn't your DH yet).

[Livewell]

I have worked 100% commission for 10+ years and have highly variable income.  While DW was working, we based our budget off her income.  Mine went into savings/investments which allowed us to build a substantial position.  Now that she is staying at home with our little ones, I have had to get comfortable with the thought of "what happens if I make $0 this month".   Having savings helps, but really it's just getting used to the mindset.  She had a great career, but my upside is well above her max, so it was an obvious choice for me to keep working when we decided to have a parent at home.

As you're building up a cash/investment cushion, just apply mustachian principles and it will all work out.

[Gina3123]

Thanks everyone, this is really great advice. I guess I need to relax a little bit, stop trying to match my spreadsheets to my accounts to the penny and just work on being mustachian. I think we will live off my income and anything SO earns can go in a separate a/c to be distributed between luxury spends and savings. Thanks again

[tthree]

My DH works commission so his income also varies greatly.  We are unable to live off my wage only, mostly due to childcare.  However DH does get a paltry minimum so he never gets paid $0.  We are able to cover off all current expenses with my income plus his minimum wage.  Whenever there is "extra" money I shuttle it out of the checking account ASAP.  DH can't help himself from spending money.

[SilveradoBojangles]

I have wildly variable income (like, 50-70K a year difference), while my spouse has a low but steady base income that fluctuates on top of that. My strategies for dealing:

- Having a larger than average emergency fund to deal with lean times.
- Our income is deposited to separate accounts, and we transfer a steady, set amount to our joint account. Almost all expenses come from the joint account (we do have a little wiggle room for personal expenditures from our own accounts, but these are low). This allows us to budget/plan for the year (I too have the desire to plan and account for every penny!).
- Keeping our expenses way lower than our income. Basically, we are sure we can cover our expenses with our income, even in lean years, and anything on top of that goes to savings.

Interesting to hear how others deal with this.

[MrDelane]

Up until recently I worked in a similar situation - my income varied wildly, sometimes making as much as 50% of my entire income within one quarter.  Months with zero billing were not uncommon, to be followed by a month with huge billings.

My parter has a government (stable) job.

Our solution was to rely on her income for mortgage/electricity/essentials.
We then took our best estimate on what was required from my income (you might be off at first, but with time you'll get pretty good at finding a number that works).
We built up an emergency fund/saving account (which was much bigger than most people's given the nature of my income).

My income would all go into that "emergency fund".
And every month we would pull out from that fund the amount that we had estimated was required for the remainder of bills and investing.

The key was to have a fund big enough that it could absorb the dips in the lean times.
It also gave us a buffer, so that if seriously lean times ever hit we could dial back our spending if needed.

Basically - think of it as paying yourself a salary every month - pick an amount and stick with it.
Dial it in as you go and eventually you'll find a balance that works for you.
It worked for us for many years.