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Does your income vary from paycheck-to-paycheck? This can make it difficult to plan your spending, but Aaron dropped a line with a trick he’s developed to adhere to a budget:
Here’s a financial hack I use because my income is so irregular. It would work as a budgeting tool for regular folks too:
I get my commission checks put into an online banking account and set up automatic deposits into my “real” checking account to pay bills and living expenses. This is great because once you figure out how much you need to live on, you can just pay yourself that amount. The rest of your income is just extra and earns interest until you allocate it elsewhere. It is easier to save money and be frugal if you never think you have a ton of money coming in.
Like many money hacks, this one is a simple mind game. But that’s what makes it neat. I like any trick we can use to fool ourselves into making smart choices.
This article is about Budgeting, Money Hacks Wednesday, 19th September 2007 (by J.D. Roth)
September 19th, 2007 at 6:15 pm
My income is quite small, but it’s very irregular. It does make it hard to formulate a budget, and I must admit that I don’t have one. I have one account for both saving and spending and simply try to spend less than I earn.
That’s probably terrible, I know ;).
September 19th, 2007 at 6:20 pm
I have an irregular income (steady wage and then tips). I calculate my average tips (daily) and then pick a $ amount that is a little lower than that. That amount gets added on to my wage. This is what I have to budget with (bills savings etc) for a month. Anything I make above average is gravy…
A similar concept to your post really…
September 19th, 2007 at 6:32 pm
I do something similar with my irregular commission income. I calculated my bills to how much I would need weekly and then set up my direct deposit to put that amount plus a little extra into a dedicated checking account to pay bills. The rest goes into a fun checking account that I use for misc. expenses.
September 19th, 2007 at 6:50 pm
I really like Aaron’s and Grant’s methods, this is something I’d never considered. Love it that everything is earning interest all along. Kev K, what do you do if you have a bad tip month? You’re already budgeted out for (a little less than) the average month, so do you have a safety net built up in case it doesn’t come in like you’d planned? Or do you cut back on some discretionary expenses?
September 19th, 2007 at 8:19 pm
My income’s irregular, but it comes on a one-week lag (I get paid for the previous two weeks every two weeks). I keep detailed records of my billing and know in general how much to expect. My wife (a stay-at-home-mom) and I are big proponents of paying ourselves first, so we load up our high-yield savings first, then withdraw the minimal amount to cover expenses as the month goes on. It’s fairly similar to Aaron and Grant’s process. I think you have to do something like that, otherwise things could really go haywire in a hurry when you get a short paycheck.
September 19th, 2007 at 10:06 pm
I really like Aaron’s idea as well as the similar ones. It also strikes me that this is a good budgeting tool for anyone, even those of us whose income is fairly regular.
September 19th, 2007 at 10:11 pm
Is this really, truly sensible? I’m a freelancer and I would never consider doing this. I have an online bank account, in addition to a traditional bank account, and it takes generally 2-3 business days for money to be transferred. As a freelancer, I don’t have the option of direct deposit, and doing this would tie up my money for far too long — there’s no way I’m going to mail my check to my online bank, wait for them to approve it, and then wait for a transfer to my bricks and mortar bank. Add to that that my checks normally come on Saturdays, so that would add a couple extra days to the whole process. That’s just foolish (lost interest and accessibility) and incredibly unreasonable. What seems much smarter is to create a budget spreadsheet, where you just plug in your check amount, and it automatically calculates what goes where (fixed or billed expenses like rent, utilities, insurance, phone, weekly pocket/food/necessities money, etc don’t have percentages), and then faithfully follow the spreadsheet each week. I have one of these, and it automatically calculates how much I transfer to my IRA and savings accounts. The spreadsheet also tells me how much I’ve earned, how much I’ve paid on bills, how much I’ve saved, how much I’ve contributed to my IRA. Having a good budget spreadsheet is an amazing resource. Obviously, I’m not a fan of the “mind game” techniques…instead, I’m a fan of just plotting a sane, non-game strategy and stick to it.
September 19th, 2007 at 10:55 pm
Myself, being in sales, and my wife, being salaried social worker with flexible part time hours in retail, we have quite an irregular income. It can be a couple thousand dollars difference from month to month.
What we’ve been doing for a few years now is this:
1) set up an emergency fund - of course.
2) the two of us have an allowance - $50 a week, plus spiffs (sales bonuses) and milage checks.
3) we set up our mortgage as a weekly payment. Our mortgage was happy to do so. (we also pay extra each week) (this gives us an extra month payment each year). This makes it so that our largest monthly expense seems less daunting as a one time payment, because it is now 4 (or 5) smaller weekly payments.
4) we have all of our monthly bills prioritized and pay them off, not by due date, but as we get the money.
5) Most months this allows us to have the whole months bills paid by the 2nd or 3rd week. If it’s a rough month and we don’t have the money to pay everything, it gets picked up the next week. When we are having a good month, we put the extra money toward the debt we are snowballing.
Seems to work for us…..
September 19th, 2007 at 11:20 pm
S, presumably before he could use this system he had built up a buffer in the online account, so he is not using this week’s commission to pay this week’s rent, he’s using the commission from three weeks ago, and the current cheque is going into the account to be used in three weeks time. It looks like the YNAB theory to me, but with the bonus of a high interest account as a holding area. The whole point is that he doesn’t need to worry about how fast his checks get deposited, the money he is using is already there.
September 20th, 2007 at 5:00 am
I recently purchased a budget software called YNAB (You Need A Budget). One of the four principles it is based on is that you should pay your bills with last month’s income. In other words, save up how much you generally make in a month and put in in your checking account. Then pay your bills with that money as you wait for your current paychecks to come in.
This allows people with variable income to know how much they have to budget (as you’re living on last month’s money).
http://www.youneedabudget.com
September 20th, 2007 at 5:02 am
That’s what I do. As an arty-freelancy type, my income is very all or nothing. So I’m incorporated, and I pay myself a lower salary no matter what I’m earning, so I maintain a cushion in my company that allows me to continue paying myself the same steady salary, even in what are technically lean times for the company. Works great for keeping personal taxes low and steady, too, not to mention the benefits in stress reduction.
It’s kind of like regulating your blood sugar…
September 20th, 2007 at 5:31 am
My husband and I own a businsess and we earn a lot of money during the summer and fall, then during the winter we don’t earn much at all. We started putting all the business income in the savings account and we draw out a “salary” for my husband. Then we do have a regular salary, it’s just coming out of our savings account, and our money is earning interest while it’s there.
If we have extra left over in the spring, it goes into retirement & savings. The plans works well for us.
September 20th, 2007 at 7:18 am
My wife and I are in somewhat of a similar situation. I am paid salary and commission while she works hourly with inconsistent hours. What we have done is set our budgeting system up so that the money I make during any given month is used in the budget for the next month to ensure that we don’t have any cash flow problems. For example, the money I made in August is used to our bills in September.
It took a little bit of discipline in the beginning to get used to that, but it makes it much less stress free to start the month off knowing how our income matches up against your expenses.
September 20th, 2007 at 7:43 pm
Jac, you misunderstand. I’m a fan of putting most money in a high interest savings account. I’m not a fan of letting interest not accrue because of mail and processing times. Instead, the same day I deposit any check, I plug the numbers into my spreadsheet and transfer the money to my bills and IRA/savings accounts. So, instead of waiting 1+ weeks for money to *get* to the bank (and imagine all the compounded interest lost when it’s considered that I (for one) get checks from my clients weekly). It doesn’t matter whether or not someone has a financial cushion — they’re still losing money if they have to wait 1+ weeks for money to get to their savings account. Unless someone has direct deposit available, this just isn’t a good plan.
September 21st, 2007 at 7:51 pm
I have worked with a similar situation for years. Between my full time job and my husbands full time job we simply can’t pay our bills so I have had a part time job that is variable work based on availability. I try to always have a months mortgage in savings in case we need to pull from it and we save around $100 a month that we ussually have to end up pulling for things like car insurance and other large but irregular bills. If we get up to $400 beyond that I send bulk payments to help snowball debt. It isn’t perfect but it provides some cushion and peace of mind until we can get better paying jobs.
September 25th, 2007 at 5:43 pm
I think being paid on uncertain terms is difficult for someone trying to get out of debt. I know someone who is self-employed, gets paid pretty irregularly and whenever she gets a big check, she blows it very quickly. She was recently expecting two large checks but both were delayed and that puts stress on her paying her bills on time. It’s also harder to say no to big purchase items when you have a sudden gain of money in your account. I also think college students, instead of getting a big loan refund check at the start of each semester, they’d be better off getting a check monthly or bi-monthly (like the real world) so they learn to budget and save. I honestly know some college students who blow their student loan checks and then live off their credit card the rest of the semester.
September 25th, 2007 at 5:52 pm
In terms of a good online savings deal, I bank with Wamu (I don’t want to sound like I’m endorsing them because I do have issues with them) but they offer a fixed 5% online savings account (according to their fine print for the life of the account as long as it is in good standing). You must have a free checking account with them already or open one the same time you open your free online account. The minimum deposit is a buck. The best part of this is you can access the online savings money very easily, online and transfer it into your checking account (instantaneously) or you can go into a Wamu bank and withdraw cash directly out of your online account. There’s no 2-3 day transfer period. Just a warning, the online savings is good only if you open it online–if you go into a bank they will only open a regular savings with very little interest.
September 25th, 2007 at 5:57 pm
Brad, how did you set up a weekly mortgage payment? Is it automatic? I once got an offer from my mortgage bank to pay twice a month (half and half) and according to their calculations, doing so and paying an extra $5 each payment would knock off 7 years from my 30 year loan! I wanted to take them up on the offer but refinanced with another bank at about the same time. I wonder if I can set this up automatically with my new mortgage bank. Or can I just go into the bank and pay partial payments with only one payment slip? Thanks, S.
September 25th, 2007 at 5:59 pm
Also Brad, how do you assign the extra you are paying each week to go to the principal? I only get one payment slip each month in order to do so.
September 27th, 2007 at 1:31 am
[...] This article explains a really cool way to trick yourself into putting money away into savings. I have kind of implemented this strategy already but I also know how to transfer those funds right back to where they came from. [...]
January 11th, 2010 at 8:26 am
Yea, my income is very irregular. I have all my bills and stuff set up automatically so that I do not have to remember to pay them. This is very useful and helpful in staying within my budget, but sometimes things are tight and I need make sure I pull from savings so that I don’t incur any overdraft fees (even thought it just goes on my credit card as protection- still has a $10 fee).
good post. thanks for the tip.