Budgeting on an irregular income

[mamalatte]

We have recently moved from living off a regular salary to a VERY irregular income, as in literally years with little or no $$$, punctuated by big sums (I am a lawyer working on contingency fee only in a very odd field).

I have found it very hard to budget. Previously (during the salaried days), my technique was basically to set a savings goal for each month. As long as I saved that much out of the incoming salary each month, I didn't really worry exactly what I was spending on (although I used past records of spending to figure out what my savings target should be).

With this new irregular income stream, we've been basically living off of savings for some time, and I find it really hard to keep expenses in check without that discipline of always saving some of what was coming in. I feel like we are spending more than we need to. And it seems hard to tell how the budget is going, when I'm just drawing off this big chunk of $$ month after month, hoping that another big chunk will come in before it's all gone, but not knowing for sure how long I need to make the $$ last.

I am thinking of moving to a more cash-based system and/or moving all $$ of out my checking account and then just paying myself a "salary" out of my "savings." But, if I do that, I'm not sure how I'd handle big one-time items like yearly taxes. Would I use the "savings" pile for the fixed, repeat costs and my fake "salary" for everything else? Anyone have any ideas?

[loosechickens]

If you have sufficient savings to do this, this is our system. Our income comes in erratic peaks and valleys, too, as bonds pay twice a year, stock dividends are irregular, some months large amounts, other months virtually nothing. (For example, this past month our "income" was about $400 and several months ago, it was $4,000), so we have much the same problems.

We work always on "next year's" income, which means that we always have cash reserves at least equal to one year of the amount we budget for our yearly budget. We spend on that money, while all the money our investments make dumps into our brokerage account, to become "next year's" money.

That way, we start out on January 1, with the amount of money (or more) of our entire year's budget already sitting in the bank in our checking or money market account (actually we keep part of it in a higher interest account and move it around as needed), so we can plan our spending, or expenses that occur once a year without regard for the erratic way our income comes in through the year.

By the end of the year, since dividends and interest have been accumulating in our brokerage account, by the following January first, all the money necessary for next year's budget is right there to start the process again.

re-reading this, it sounds confusing....suffice it to say that we just work a year ahead, having the money for THIS year on hand on Jan 1st, and letting all income accumulate unspent, to provide the money for next year's spending.

With that yearly budget, we know that we have, for purposes of illustration, $30,000 to spend for the year, which would be $2,500 per month. Say our expenses that we pay only yearly amount to $6,000. So we consider that our monthly "budget" for other spending would be only $2,000 per month. And that's what we budget for regular monthly spending, since the big ticket items that are paid yearly need the rest of that money set aside. Does that make sense?

It sounds a lot more confusing than it is. In practice, it works great. We can look at our books at any time during the year and see if we are over or under budget, there is always money available to pay whatever needs to be paid, regardless of how erratic income is flooding or dribbling in, and since we've already "subtracted" from the yearly budget the amount that will be needed at various points of the year to pay stuff that occurs only yearly, like car and motorhome insurance, etc., we can parcel out the rest of the funds for regular monthly expenses with some degree of predictability.

[Stella]

I am in a similar situation. DH is in a construction related field and is off part to all of the winter and I am a SAHM. I am aiming for LC's system, but we aren't there yet as far as savings. Actually LC, our post was motivating for me to be a little more aggressive in saving.

The other thing we have been doing is to try to reduce our monthly obligations to as little as possible. No car payment, no house payment, no monthly cell phone bill, no cable, no credit card payments. Basically keeping our fixed costs low. In leaner times it's easier to cut back on the variable expenses. Our fixed expenses are about 14% of our average monthly income right now.