Budgeting when Paychecks vary month to month.

[Redraidernurse]

I am paid hourly and receive a paycheck every 2 weeks. Because of the nature of my job ( A nurse) some weeks I work full time hours and others I am put on call and my paychecks are small. In preparing our budget...how would you advise someone whose paychecks can vary widely on how to draw up a budget? (Hope all of this made sense) Thank you.

[disneysteve]

Overall, do you earn enough to always cover all expenses? If so, then this is merely a cashflow issue. If not, it is an income and expense problem and that is much more difficult. Let's assume that you do earn enough and work from there.

Make a list of all of your monthly expenses starting with the most important and working your way down to the least important. So your list might look something like this:
food
rent
utilities
gas
student loan
emergency fund/cash reserve
internet
cable
dining out
clothing
gym membership

It is up to you how you want to prioritize. The point is, each paycheck needs to be spent first on the necessities and on building a cash reserve. If you have a larger paycheck, pay the necessities and set aside money in the reserve to cover you for when you have a smaller paycheck. If you get a large paycheck, pay the necessary stuff and then blow money at the mall, you'll be in trouble when the small paycheck comes along. Make sure that you always keep enough on hand to cover the necessities. Once you do that, money above and beyond what is needed for the necessities can be used for the discretionary stuff without having to worry about paying the bills next month.

[kork13]

BIG PICTURE: On a variable income, you want to plan for the worst-case, then work outward from there. I think the way to start is to know your needs. From there, determine how you can ensure your needs will be met. Finally, decide how you will operate when your needs are met and have additional funds available. I realize that I'm very logical in my thought process, and none of this may work for you--so take it for what you will...

First off, determine your expenses, both fixed and variable. The fixed expenses are unalterable regardless of what you do or how much you make in a given pay period. That might include rent/mortgage, debt payments, insurance, childcare, taxes/SS/medicare (this will be a certain % of gross income), and to an extent, gas/auto costs, groceries/food, and utilities (although through discipline, these can be decreased when necessary). As for variable expenses, you want to identify the minimum practical amounts you need to survive/live happily. Those things might include entertainment, clothing, personal care, gifts, and so on (recognize that some of these might be 'zero'). I would also include in the 'variable expenses' a defined minimum level (percentage-wise) that you will always, no matter what, contribute to your retirement savings--perhaps 5% of your average income. Add up your fixed and variable expenses as your baseline--this is the minimum you need to ensure you make every month (or pay period, if that timeframe is easier for your planning cycle). Is that baseline lower than your average paycheck? If not, then you have bigger problems, and you need to re-evaluate and determine where you can trim your expenses.

From there, I would recommend a tiered savings strategy. First, a fixed level of an Emergency Fund, funded with at least 6 months' worth of your average monthly expenses (not your minimum baseline). The EF would be dipped into only for periods of unemployment, or critical, large expenses that come up suddenly (emergency home/auto repairs, emergency medical costs, and so-on). Second, a 'Backstop Fund', which serves to even out your income during weeks that you have low hours/income. This might be 1-2 months' worth of your baseline expenses, and its sole purpose is to fill the gap between your minimum baseline expenses and your average monthly expenses. By definition, you may need to dip into this on a fairly regular basis, but that's fine as long as you make re-filling your Backstop Fund a priority during those weeks with higher-than-average paychecks.

Once you've determined the necessary levels of those two (EF & Backstop), you need to figure out what you'll do with your money when you earn in excess of your average monthly expenses. The priority, as I already mentioned, is keeping your Backstop funded. But after that, first up should be determining the level of your long-/mid-/short-term savings. Long-term is probably mostly retirement, or anything else 20+ years down the road. Mid-term would be kids' college funds, home purchase funds, and other stuff with a timeframe of approximately 5-15 (-ish) years. Short term would include car purchases and regular auto repairs, general home repairs, vacations, and other general savings goals. Beyond that, you need to set goals for how you enjoy yourself, and you should make it a point to set money aside in your monthly budget for doing those things you enjoy.

In the way of an example to demonstrate my thought process, here's an example scenario--After tracking all of your income and expenditures (big and small) for a few months, you determine:
- Average monthly expenses: $3000/mo.
- Minimum baseline expenses: $2500/mo.
- Income varies between $2000/mo to $4500/mo, but averages around $3500/mo.
*****Average income > minimum baseline -- good, this checks.
Next, tiered savings:
- Emergency Fund = $18000 (Avg expenses x 6)
- Backstop Fund = $2500 (Equals Baseline)
*****Note that your Backstop will allow you to maintain your average monthly spending for up to 2.5 months of consecutive minimum ($2000) paychecks. Is it possible that you could go longer than that with consecutive minimum paychecks? Double your Backstop if that is the case.
Finally, what to do with the rest--"the rest" means any income above $3000 (your avg expenses) and after re-filling your Backstop Fund:
- 30% of "The Rest": Long-term savings (retirement)
- 20% of "The Rest": Mid-term savings (house, college, etc)
- 30% of "The Rest": Short-term savings (vacation, house/car repairs, general savings, etc)
- 20% of "The Rest": "Fun Money" (for doing whatever makes you happy)

Do all of this planning ahead of time and it will simplify everything moving forward for you. The biggest thing for you to remember is to make your budget work for you! It's your budget, make it whatever you need it to be, and realize that you're not beholden to it--if you see that a change needs to be made, do it.

Good luck with your planning, and hopefully I haven't confused you too much...

[maat55]

To summerize the aboves, Only spend for necessities until you have at least one months expenses in saving, then take part of your excess for current bills and apply a percentage you feel comfortable with towards building further EF, paying off debt and some for spending.

If your job is stable, you can build your EF slower and concentrate on paying off any consumer debts. If it is not stable, I would concentrate on the EF primarily, then consumer debts.

After all consumer debt is paid and a 3 to 6 month EF is in place, you should start considering retirement savings as just another necessary expense. After you have one months expenses and have a stable job, investing to the match in a company 401k could apply.

[krantcents]

I am paid hourly and receive a paycheck every 2 weeks. Because of the nature of my job ( A nurse) some weeks I work full time hours and others I am put on call and my paychecks are small. In preparing our budget...how would you advise someone whose paychecks can vary widely on how to draw up a budget? (Hope all of this made sense) Thank you.

Have you been working for a number of years? If so, I would try to find an average that is conservative to use as a budget. Any excess should go into savings for those weeks you receive less. Budgets are meant to be revised so try that if it doesn't work, try something else.

[jIM_Ohio]

The answers above look good.

Focus on 3 issues

1) fixed vs variable expenses
2) needs vs wants
3) spending less than you earn through the whole process, focusing on a month to month analysis


some needed expenses (like fuel for car and heating for house) are variable costs
some wants (like cell phones and cable TV) are fixed costs

(minor point) focus on which expenses you can control the most (for example you can control eating out, but cannot control cost of cable). This control does not trump the above issues, but it does help as you analyze problem deeper. Focus on top 3 above, and only use control when prioritizing.

Goal 1 is to plan variable expenses for worst case (what is the highest electric bill or car fuel bill per month)?
Goal 2 is to make sure all needed expenses are funded each month

Once you do #1 and #2 you know the minimum you need to earn to "survive".

Goal 3 is to then fund "wants" in order of priority. If you have some months where not all wants are funded, list them in order of priority (like cell phone is more important than cable, cable is more important than eating out). Some of this prioritization is about control- if you cannot control the expense, it needs a higher priority on this list.

Part of all of the above is having cash in the bank. If you have a month where you earn more, set aside about 40% of the surplus for a month where you do not earn more... does this 40% cover enough of the income shortfall? If you have cash in the bank, I doubt you would be asking this question already... so part of "needed expenses" is setting aside money when income comes up short.

[TBH]

My income varies dramatically from month to month. It was driving me crazy until I devised the following scheme.

I use ING Direct, because it's easy to move money between multiple accounts there, but you can use another bank if you prefer.

I have a savings account called "holding tank." I put all my income in there, large checks or small.

Once a month (although you could do it every other Friday to mimic normal biweekly pay) I pay myself a fixed salary out of that account. It gets transferred automatically into my checking account.

Obviously you need to make sure your average earnings cover all needed expenses, savings, and fun money as other people described so well earlier in the thread.

But this way works well for me because it means I don't feel the ups and downs of my income. As long as I am always earning enough, averaged over a few months, to cover what I need to cover, I don't worry too much when I earn $1500 one month and $3000 the next.

Obviously my hope is to earn more than the bare minimum so that over time I build up a cushion of several months.

I do have separate accounts for big emergencies and for tax savings (I'm self employed so I have to set aside money as it comes in to pay taxes) but this account is JUST for day-to-day living.

Hope this helps.

[Redraidernurse]

Thank you all so much for taking the time to reply! It was extremely helpful and I am eager to sit down and prepare to budget!

[asmom]

I am paid hourly and receive a paycheck every 2 weeks. Because of the nature of my job ( A nurse) some weeks I work full time hours and others I am put on call and my paychecks are small. In preparing our budget...how would you advise someone whose paychecks can vary widely on how to draw up a budget? (Hope all of this made sense) Thank you.

Hi, I worked per diem for many years when my kids were small because I needed to have more control over my schedule as well as for the extra $$$. As you know, per diem means you are cancelled when the census is low or if they have enough regular staff. In other words, my paycheck was unpredictable.

I dealt with this by 1)making sure we kept our expenses within reach of my husband's salary. We used this principal when we bought both of our houses and when we bought cars also. It's easier than it sounds.

2) I paid my bills ahead a month or at least kept the money in checking a month ahead. So this being December, I would be putting aside February's expenses.

These two principles worked well for me during that time in my life and allowed me to work that way for many years.