Smooth Our Irregular Income
Whether you’re freelance, are paid every two weeks, or simply have irregular commission-type income, it’s often difficult to budget when you aren’t sure how many dollars are coming in each month. This post was inspired by a friend of mine who was discussing coupled finances. Her husband was paid every two weeks, she was paid twice a month, once on the 15th and again on the 30th/31st. This meant that in each month her income was stable but his wasn’t, on certain months he would have three paydays and she would have two. The disparity between the two wasn’t the issue but budgeting for the difference is because your total household take home pay for that month will vary. This made it a similar problem that freelancers face with irregular entrepreneurial income, for lack of a better term.
Her solution? Direct deposit both of their paychecks into an ING Direct and then have an automatic transfer of funds to their main banking account. In essence, they are “paying” themselves and that payment is regular and equal. This offers two benefits:
- Smooths out that irregular income by taking “converting” a two-week pay cycle into a twice a month pay cycle (15th, 30th).
- Automatic savings, by leaving what you won’t need in an ING Direct, it’s much easier to save because you don’t have to make a conscious decision to save; it’s automatic.
This translates to irregular income folks because you establish a reasonable “paycheck” and keep the rest squirreled away in a high yield savings account.
What’s the alternative to this? The alternative is to just have it deposited into your account and for you to keep yourself on a strict budget, keeping in mind that your income is irregular. With my friends, it was irregular but dependable so the irregularity wasn’t a big deal. With entrepreneurs, it’s irregular and not as rock solid dependable so this system may work out better because it forces you to actively be leaner with your budget so you aren’t caught in a difficult spot if the income slows down.
Anyone have to deal with this issue and have another option? Please do share!
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Tags: Coupled Finances, Irregular Income
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There are 5 comments, add your thoughts now!
I deposit all of my “extra” income (from surveys, second jobs, etc) into a savings account. I don’t even have a chance to see it. I pretend like the money doesn’t exist, so it has really helped to beef up my savings!
Interesting post, and very relevant to my own situation. Now, I may be a tad dense, but for most freelancers, there is no option for direct depositing your checks. Also, you are usually paid on a per-project basis and only at the completion of the project. Of course, there are many instances where one is paid at several successfully completed stages of an ongoing project (every month, after a review of completed portions, or at some other predefined period of time/completion) but for the most part a freelance job lasts only a short time and a check is handed out 30-60 days AFTER completion. So it is quite possible for a freelancer to receive NO income at all for up to 3 months. And then they might receive 2 or 3 large checks all at the same time. I wonder how you would suggest someone in that situation should handle their finances to help smooth out the bumps?
For my own situation my wife and I treat my income as supplemental, even though I actually earn a bit more than she. Her checks are direct deposited into our eSavings and we pay our bills from that. When I get checks I deposit them and allocate the money to several different accounts based on our current needs. Some to our savings, some to our emergency fund, some to our checking account if needed, etc.
We are just starting down the road of doing this as well. Though for a different reason. We are doing it to help curb spending altogether. I just blogged about it last week (http://realworldfinances.blogspot.com/2007/11/our-new-financial-structure.html)
I don’t think this is actually a problem unless you are living paycheck to paycheck.
Let’s say a couple is able to create a surplus most months of the year, then they will have a stash to draw upon when they pay bills etc etc. So whether they pay every 2 weeks or on the 15/30th shouldn’t matter since the money isn’t going straight from paycheck to bills.
My wife has always been paid monthly (once a month), and until late last year, I was paid bi-monthly (twice a month; the 15th and end). Now, she continues as she has, and I get paid bi-weekly (once every two weeks).
I had already had a savings schedule worked out for major areas of finance for our household. Since I’ve always had a “first of the month” and “middle of the month” periods for when bills got paid, it still works out, I simply have to mark for when the “first” or “middle” — my paychecks — actually hit our checking account and dispense accordingly.
For us, the “additional” two weeks that I provide allows us to be able to, say, squirrel away a respective car payment at the beginning and end of a given year for other necessities at the time, so it’s almost a forced “extra income” savings plan on top of everything else.
It always takes additional work to budget, but once you get a system worked out after a pay frequency change, it works really well.
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