Coping with an inconsistent income

[amastewa93]

I've chatted about my husband's work a few times here. Earlier this year, we contemplated buying a mechanic's shop so he could work for himself. Instead, we wound up finding someone to buy the shop he was at and he stayed on as a mechanic.

Most mechanics get paid on flat rate, meaning that if the shop charges five hours for the job, and my husband does the work, he gets paid for five hours (even if it takes less). This is GREAT if the shop is busy and the work is getting done quickly. However, the shop has been insanely slow. In the month of November, my husband brought home around $500 total. That just barely covers the payments on his tools. One week it will be $200, the next $120, and one week back in October it was $800.

We have some pretty aggressive debt-free goals that makes working with this type of inconsistent weekly pay really hard. He has decided to look for a shop that will offer him a weekly minimum guaranteed payment - and has one attractive offer so far. But, in the meantime, how do you cope with an inconsistent income (especially when you're paying off debt)?

[disneysteve]

Obviously, he needs as job with a more consistent income. Making $500 for a month is insane.

As for dealing with variable income, you need to have a budget that is written in order of priority: food, shelter, medical care, transportation, etc. The point is to use whatever money you have to pay the most important things first. If you run out of money before you run out of budget items, you want to be sure the ones not getting paid this month are the least important ones. Certainly, paying anything beyond the minimum on debts would be at or near the bottom of the list of priorities. Heck, even paying the minimum could be low priority if there isn't enough money to cover more vital things. If it's a choice between rent and the credit card bill, for example, the money needs to go to rent.

Dave Ramsey has a worksheet for this in his book The Total Money Makeover.

[kork13]

Agreed with Steve. You basically need to run a prioritized budget, with all of your anticipated expenses for the month prioritized from 1 to 50 (or whatever).
#1: Basic Food. #2: Housing. #3: Utilities. #4: Basic transportation. #5: Medical. ...#10: Debts ... #30: New clothing ... on & on, as far as you need to go.
Once you get that done, look at your TOTAL monthly income, between both of you. What is the very minimum income that you both could come home with? What do you expect to bring home? Obligate your income based on your prioritized expenses list, and that's your budget. As the money flows in, use that income based on your priorities.

So if you budget $300 for food, $700 housing, $150 utilities, $100 transportation, etc..., the first $300 of income gets put into an envelope (or whatever) for food costs. The next $700 of income (maybe comes in across 2 weeks) goes to your rent. Once rent's paid, then you put $150 aside for utilities, and $100 for gas, etc. Follow that habit pattern.

The other side of that is building up a small side-pot of money to cover the low periods. In any given month, let's say you normally have $2200/mo of expenses and earn a minimum income of $1500 (and it normally happens once every 2-3 months)... Then you need to build up perhaps $1500-$2000 and keep that set aside to cover any of the low periods. When you go through a low period, draw from that account. When you have a high month, add back into that account. This side account is strictly there to help you sleep at night & know that everything will be okay, because that cash will even out the inconsistency of his income.

[disneysteve]

The other side of that is building up a small side-pot of money to cover the low periods.

This is a critical point, especially in your case where you are focused on debt repayment. Don't make the mistake in a good month of putting the excess all toward the debt. Make sure at least some of that excess is being set aside to cover costs during the months where you come up short.

[greenskeeper]

budget for the lowest expected income....anything higher is a bonus

[disneysteve]

budget for the lowest expected income....anything higher is a bonus

Agreed, which is where that prioritized budget comes in. What do you pay first? What do you pay when you have more than needed for the top priorities?

[amastewa93]

Dave Ramsey has a worksheet for this in his book The Total Money Makeover.

We've been looking into the Financial Peace University for the new year.... but I may go ahead and buy that book first!

He will start his new job in two weeks and that has a guaranteed weekly pay of $850/week with the potential to earn more if he does more work than that. That will make a HUGE change. His first check won't be until after the first though (because he is working out his two weeks), so we still have a few weeks with this iffy pay of $100/week... and possibly a week "in the hole" with his new place of employment.

[amastewa93]

budget for the lowest expected income....anything higher is a bonus

Yes - right now, we are going to budget to live off of my income alone and save whatever he makes, I think. I am salaried so I get the same amount every two weeks, plus any freelance I'm able to do. I think if we do this we will be on the right track in a short amount of time!

[amastewa93]

The other side of that is building up a small side-pot of money to cover the low periods. In any given month, let's say you normally have $2200/mo of expenses and earn a minimum income of $1500 (and it normally happens once every 2-3 months)... Then you need to build up perhaps $1500-$2000 and keep that set aside to cover any of the low periods. When you go through a low period, draw from that account. When you have a high month, add back into that account. This side account is strictly there to help you sleep at night & know that everything will be okay, because that cash will even out the inconsistency of his income.

This is where we failed most recently. Our EF is basically drained because the shop was busy at first and I was used to that amount coming in. Then we had two actual emergencies and his pay went down to $100 a week, essentially. As soon as we can, we will be socking away a new EF and I think a separate savings for the "low period," as you mentioned... though his new job won't have those because he has a guaranteed salary, thank goodness.

[disneysteve]

He will start his new job in two weeks and that has a guaranteed weekly pay of $850/week with the potential to earn more if he does more work than that. That will make a HUGE change.

That sounds great. You just have to squeak by a few more weeks until that first new paycheck. And then you'll have to see what that works out to in take home pay after taxes. Once you have that info, you can make a new budget as you'll both have set incomes. Until then, live as lean as you can. Pay just the minimums on everything (if you can). And first priority once the new income kicks in will be replenishing the EF and catching up if you fell behind on any payments.

[kork13]

As soon as we can, we will be socking away a new EF and I think a separate savings for the "low period," as you mentioned... though his new job won't have those because he has a guaranteed salary, thank goodness.

Some of this is technique & personal preference... But if it were me, I'd have the normal 3-6 month emergency fund, but in addition to that EF, I'd have that "highs & lows" type account to help smooth out week-to-week, month-to-month fluctuations. What that could also mean is just maintaining a bigger-than-normal buffer in your checking account. For example, I normally use a $1000 minimum 'buffer' in my checking, just to make sure things stay afloat. But if my income was irregular/fluctuating, I might bump that up to $3000-$4000, and as high or low months happen, the large buffer is there to even things out in either direction. As I think about it, that might be the simplest way to implement that sort of a system, since the income & outgo already flows through that account anyway.

All of that said... It may come to matter less once his new job with the minimum base pay starts up -- that sounds like a MUCH better gig for him, congrats!

[LivingAlmostLarge]

Dave Ramsey talks about this. You unfortunately have to have the $1k EF but you need a separate fund for irregular income. He said you basically have to pay yourself say $1k/month salary from this pot no matter what to make the bills so when times are good it's higher and when times are bad you draw. It can be a year of salary like $12k to cover him every month for a year of slow times.

I believe some other people on this board have dealt with this Lucky Robin I feel like has. Her husband used to work two weeks on and off and they always had a monthly budget and put money away. And grandma Ray. It's a very different budgeting lifestyle.

Years ago one of my jobs was once a month paycheck on the 1st of the month. At that time that caused me to pay all bills 1st of the month. It's a habit that tended to carry over and caused me to do month ahead. I always had a month salary buffer because of it. It's hard though to sometime get the money in order to get used to living a certain way. It was tough for us to transition from every 2 weeks to 1 month payment. We had a few really lean months where we lived on almost nothing because of it to get a month ahead.

[sblatner]

We've been looking into the Financial Peace University for the new year.... but I may go ahead and buy that book first!

He will start his new job in two weeks and that has a guaranteed weekly pay of $850/week with the potential to earn more if he does more work than that. That will make a HUGE change. His first check won't be until after the first though (because he is working out his two weeks), so we still have a few weeks with this iffy pay of $100/week... and possibly a week "in the hole" with his new place of employment.

If you send me your address, I'll send you a copy of Total Money Makeover. I keep extra copies just for this situation!

[amastewa93]

All of that said... It may come to matter less once his new job with the minimum base pay starts up -- that sounds like a MUCH better gig for him, congrats!

Yes!! I'm glad that things should be getting a little easier for us financially. It will be a good start to the new year.

[amastewa93]

If you send me your address, I'll send you a copy of Total Money Makeover. I keep extra copies just for this situation!

Wow! Thank you. I'll send it via private message.