8 - 2009

Budgeting on an unpredictable income

Earlier this week, I was interviewed by Laura Rowley, a writer with Yahoo! Finance, for an article that the site published today, called “Is Volatile Income the New Normal?”.

You can read the article here. It talks a little bit about my business’s and family’s income fluctuations and offers some observations and insights from me, as well as from some personal finance experts.

Almost exactly 10 years ago (wow!) I left my public relations and marketing career, where I had worked for a firm in Denver and a culinary school in New York City, and started my own consultancy. About five years ago, I transitioned into more writing and editing than media relations work, although much of my corporate work still supports public relations and marketing departments. Over the years, in addition to my own business’s fluctuations, Mr. Cheap and I have taken turns working full-time; working part-time; in his case, staying home caring for our daughter; and going back to school to change careers, in his case.

All of that adds up to monthly income that varies wildly. A year or two ago, when I was insanely busy, some months’ income was ten times that of my first months in business. Now things have settled down to a saner pace, which is delightful for my psyche and for letting me catch up on projects like this blog, but it means our baseline is lower.

How is a  budget to cope with these variations? Some of the strategies I’ve learned from 10 years of fluctuating income include:

1. Make a baseline – We know what our baseline income typically is, and we base our budget on that figure. Then if we have extra, we can save it, splurge, or pay off debt. All expenditures must be based on the baseline, not on what might be or what was a big rush last month … tempting as that is.

2. Budget – In August, we began using an “artificial scarcity” budget in which we transfer spending money weekly to a separate checking account and pay with a debit card, to hold expenses within our budget (just like we used to do when we worked for cash in our youth!). So far, it is easier to handle than the detailed budget tracking I used to use. However, I will say that having done detailed budgeting for many years means that I know just what things cost us, which makes it much simpler to do automatic cost analyses when we look at a purchase. Whatever system you use, planning how you spend is all the more important when you don’t know just how much will be coming in each month.

3. Pay ourselves first – I have automated savings for many things – school tuition, holiday gifts, vacation, emergencies, summer camp, etc. Those savings are transferred automatically from our checking account to specific savings accounts with ING Direct, so that we are not tempted to let savings slide during a low month. The benefit of this is that when a big expense comes up — new tires; the dog needs his teeth cleaned — we can pull from emergency funds, even in a low month.

4. Plan for taxes – My husband has income tax withheld automatically from his paycheck by his employer. I save a portion of every check I receive (ideally, 25%, to leave a good-size cushion or to allow for a bump up in the income tax bracket; in lean times, perhaps 18%) in a savings account to pay my quarterly estimated income taxes. Ideally, again, I will have leftovers, especially if I have earned more than anticipated, so a jump in our owed tax won’t kill us come tax time.

5. Look at alternatives – When things are down, we try to be creative. When my husband needed to buy a commuting vehicle a couple of years ago, he worked nights waiting tables to save the money. It wasn’t fun, but it got us a spare set of wheels. I am focusing more attention on new avenues of business right now, including monetizing this blog.

6. Live frugal – Readers here might have heard this one! We try in many ways to squeeze more month out of our dollar. I do things myself, watch for bargains, buy used, do consignment, sell on Craigslist, Amazon and eBay, trade services or items, and more.

7. Don’t add ongoing expenses – Talking to Ms. Rowley for the article, she raised an interesting point, which she includes in her article from another source. If you live on an income that varies, don’t use a flush month to commit to trading in your paid-off Toyota for a lease on a Lexus. We tend to use big bursts of income to save, pay off debt, or spend as cash — perhaps on a bathroom re-do or the set of shelves we installed in our living room last year. Tempting as it is, we don’t assume more money will last forever. That means we avoid adding new bills, getting used to too much luxury (once we get used to dining high on the hog, it’s hard to cut back — we know, because that’s our biggest weakness!), or especially, as the person quoted in the article mentions, adding new revolving debt.

8. Stash what you can. In addition to scheduled savings, I try to stash more wherever we can. A few examples of what we do:

  • We have an umbrella liability insurance policy. It costs us about $150 a year, which our insurance company breaks into monthly auto-deducted payments of about $22, for seven months. The other five months, they don’t deduct anything for that policy. I still transfer $22 out during those months, to our emergency fund. When the new year begins and the insurance deductions start again, I leave our emergency fund savings $22 higher, so that monthly contribution grows year by year.
  • Early in the life of this blog I wrote about our nation’s dismal savings habits and my intention to save a dollar a day. Since the “Great Recession” started, people’s savings habits have improved. And I’m with them on that front – since about July 2007, I have had my savings account automatically pull $7 out from my checking account every week. That’s $1 daily — and my total savings has been about $812, completely painlessly. It’s not a fortune, but it’s enough to cover a significant car repair or a chunk of a mortgage payment.
  • In August, we paid off our car (yippee!!). We thought about buying another one, especially given that Mr. Cheap’s little car finally bit the dust. But for now, he is busing it and biking to work, so we can live with one vehicle most of the time, and perhaps borrow or rent one on the rare occasions when we need two. What we had as a payment is being funneled into two places — a portion is going into savings, so that when we do need to replace our current vehicle, we’ll have something saved, and the rest is going into funding a retirement account for me, an effort that has been sorely neglected during my self-employment. My goal is to get used to this level of spending/savings, so that if and when another car payment comes around, it will be on top of these savings, not instead of them.

I suspect that many of you readers have great ideas about budgeting and money in these hectic times. Please share your suggestions, too.

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