Author Topic: How do you meet budgeting/saving goals with an irregular income?  (Read 169 times)

M0ntana

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Hey guys,

Just thought I'd run this by y'all to pick your brains on the best way to set (and, hopefully, meet) saving goals.

The fiancée and I both have irregular income. I am a partner at a small law firm and she works with me as a contract attorney (her compensation being directly tied to her billing). Back when we were both salaried associates, I had no issues making a budget and sticking to it since I knew exactly how much money was coming in every two weeks. Now, however, we have some good and some not so good months, which leads to a feast or famine type of mentaiity that is rather annoying and/or disheartening at times.

This has led me to prioritize my emergency fund, which is now at a passable 4-month net expenses level (but we could scrape pennies and live 5-6 months off that amount). I fund these with an AFP thing that debits a certain amount every month, but find myself either adding to it or taking it out to pay for expense in leaner months, which kind of kills the purpose of having an AFP.

Do any of you have some budgeting/saving tricks for those of us with irregular incomes? Though allocating a certain percentage of earnings to savings makes sense in theory, I have quite a hard time setting a savings goal when I don't know how much of what I make truly is "extra".

Any advice is definitely welcome. Thanks a bunch!
-M

katscratch

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Re: How do you meet budgeting/saving goals with an irregular income?
« Reply #1 on: January 21, 2019, 07:04:06 PM »
From how you worded things it sounds like your primary issue may not be savings but rather not knowing what you're spending. Budgeting isn't as much about what you earn as what you spend.

Do you know what the total of all expenditures was over the last year? If so, average that out per month and there's your budget. Anything above that is potentially "extra". You'll have some months where you earn more than your "budget" number- great, you can pad it with a "buffer" for the months where you earn less. I personally like to have a buffer of a month or two, with a regular income. You may want closer to 4-6 months as a buffer in case you have a streak of lean months -- looking at your income over the past year should show you those patterns.

I personally budget everything as if it occurred monthly, so my routine expenses are averaged out - my every-four-year certification fee, for example, works out to something like $7/month, but I include it anyway. When I first started thinking of budgeting as a forward-thinking exercise instead of "here's my paycheck, subtract bills, here's what's left" I reassessed once a month. For me YNAB made a lot of sense and was visually appealing - I'm not as fond of their current format but the concepts helped me smooth out the ups and downs of spending I was experiencing in a paycheck-to-paycheck mindset.

Malkynn

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As PP said, your income pattern should have virtually nothing to do with your spending pattern.

For sure, with variable income, it's very difficult to predict how much you will be able to save or how quickly you will be able to reach a savings target.

However, you should have a decent idea of your minimum, average, and maximum annual earnings. So have a minimum savings goal, an expected savings goal, and anything above that is gravy, just like when salaried people get bonuses occasionally.

Most "variable" income people are variable monthly, but not so much on an annual basis. So as long as you have access to liquidity to smooth out the monthly variations, it shouldn't be an issue at all.

Freedomin5

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I have an income that varies from month to month. What worked for me was to look at my lowest income month and set my monthly budget based on that income. Anything over that was considered extra savings.

For example, last year, my lowest income month was $6000, so I built my budget assuming $6000/month income, which includes contributions to investment accounts (since there is no way I can spend $6k in one month). Over the year, my income varied from $6k to $12k, so anything over $6k was automatically put into savings.

Bracken_Joy

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I have an income that varies from month to month. What worked for me was to look at my lowest income month and set my monthly budget based on that income. Anything over that was considered extra savings.

For example, last year, my lowest income month was $6000, so I built my budget assuming $6000/month income, which includes contributions to investment accounts (since there is no way I can spend $6k in one month). Over the year, my income varied from $6k to $12k, so anything over $6k was automatically put into savings.

+1, what we did exactly. Husband and I both have variable incomes.

Laura33

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I had a highly variable income for a few years, and what @Freedomin5 said is what I did.  You need to budget what lifestyle you can afford based on your leanest month - including setting savings goals that will achieve at least a minimum version of your long-term plan.  Then when you have a better month, you can target that towards some extras - vacation, additional savings, eating out, additional savings 😉, etc.

It also sounds like you need the structure of different accounts.  In particular, you need both a “real” emergency fund for true emergencies AND a slush fund that you add to in good times and draw from in lean times.  I agree with @katscratch that YNAB might work for you, because it forces you to allocate money for your different goals in advance.  But you can also do it with physically separate accounts.

trollwithamustache

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I have an income that varies from month to month. What worked for me was to look at my lowest income month and set my monthly budget based on that income. Anything over that was considered extra savings.

For example, last year, my lowest income month was $6000, so I built my budget assuming $6000/month income, which includes contributions to investment accounts (since there is no way I can spend $6k in one month). Over the year, my income varied from $6k to $12k, so anything over $6k was automatically put into savings.

+1, what we did exactly. Husband and I both have variable incomes.

plus another one.

Dicey

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I don't think I've seen this addressed before. They always say, "Pay yourself first ",  but that's hard to do if you are on commission. I was for the majority of my career. Here's what worked for me. Some would argue that it's inefficient,, but those people probably never experienced wildly fluctuating paychecks.

I. Set up automatic withdrawal into your 401k or equivalent. Typically, I "only" saved 10% here.

2. Save enough in your checking account until you have a cash cushion. The goal is to build it up enough so you can always be living on last month's money. Better still, the month before that.

3. Use checking account as an accumulator. Once it gets over your designated cushion amount (which for me was 2-3 month's expenses) sweep the excess into savings until you have an EF fat enough to let you sleep at night.

4. Once the EF gets to where you want it, sweep every bit of excess into investments. Repeat, repeat, repeat.

5. Instead of a traditional budget, focus on keeping spending as low as possible and track every penny. Mrs. Frugalwoods' 30-Day Budget Challenge is a very effective method. You can start it any time.

6. Pay attention to income tax withholdings. Because paychecks typically peak and valley, "peak" checks can have too much taken out. The IRS only requires you withhold approximately you owed the previous year. (Look it up, I am not a CPA.) Adjust accordingly and save/invest the rest. Don't wait for a huge tax return.

7. Challenge yourself to tuck away random amounts of money such as any commission over X amount, bonuses, windfalls, etc.

8. If you are reimbursed for mileage or other expenses, try to cash flow them and bank your reimbursement checks.

9. If your job includes perks like a company car or paid cell phone, try to save the equivalent value each month.

10. Don't obsess about your overall savings rate, as many people do on this site. Watching your account balances grow and calculating the percentage saved at periodic intervals is also quite effective.

All of these tricks got me to FIRE on a sub-100k income in a HCOLA, so I know this strategy works. It certainly takes away a good deal of the stress of earning straight commission.