Some of my dearest friends in the world are both realtors. And although they are wonderful at what they do, the realty business is a %100 commission business and is consequently very competitive and difficult to make a living in. However, it has very flexible hours, and can be extremely rewarding business.
So how do you budget when you might have a $7,000.00 month one month and an $1200.00 month the next? I am going to lay out a plan for you today and I hope is going to help some of you finally come to a place of balance in your unpredictable income. This is not the only plan for managing a commission-based salary; however, if you have a mountain of credit card debt, you may need to re-evaluate the plan you have in place. It is too tempting to use your credit cards during the low-income months, thinking you will pay them off during the high months, but credit cards can quickly get out of control. It is so difficult to have accountability in what you are spending. Your budgeted spending tends to go out the window when you are freefalling on credit cards.
I believe the key to budgeting on a commission-based income is to set up an “escrow” savings account for yourself, which you contribute to out of every paycheck and from which you supplement your income to pay your bills. An “escrow” account in terms of real estate is a holding fund from which your bills related to your property are held and paid out of. You typically contribute a little to it each month out of your mortgage payment, and then, for example, when your homeowners insurance is due, the payment would be made out of your escrow account. You contribute the rest of the year to be able to afford that large payment when it is due.
A personal “escrow” savings account works very much the same way except that you are managing it yourself. So this is how you would set it up. First, you will need a savings account set a side specifically for this purpose. This is not the savings account that you will go to when your car breaks down. I am going to be addressing savings accounts specifically next week, so please come back for more information on that and the technicalities of how to get that set up. You will only use the funds in your escrow account to fund your budget in the low months.
So how do you know how much to fund your escrow savings account with? We are going to base your escrow savings account on your Net income from last year. Let’s say that you earned $50,000 last year (after taxes, and whatever other deductions come out of your paycheck… this is take home, budgetable income.) You are going to base your budget on $50,000, giving you $4166.67 per month for your budget, and $2083.33 per bill period (please see my blog entry from May 5th entitled “Simplicity” which deals with setting up your bill periods –beginning and middle of the month). Now you know your particular industry, and if last year was a phenomenal year for you and you don’t expect the same earnings this year, then you need to set your budgetable income at a realistic amount that you know you will earn. Also, do not include your bonus (if you received one), in this figure as you have probably spent it and thus it is not usable income for this year. You may use it in your budget for next year if you commit to putting it into your escrow savings account and not just spending it.
So here is the critical factor. After you have totaled up all of your bills and living expenses per month (this should include everything you spend money on like clothing, hair appointments, groceries, etc), I want you to subtract that amount from your monthly budgetable income total (so $4166.67 in our example). If the difference leaves you with surplus money (in other words, you spend less on your budget than what you earn, which is a good thing) you are then going to put in another category for you budget for surplus savings. Every month you will transfer this amount into a separate savings account. This is the money that you would fix your car with, or go on vacation. That way you are never taking unbudgeted money from your escrow savings account. If you do not separate out the surplus, it is very difficult to keep track of what is needed for your budget and what is extra. “Extra” spending has a way of “taking over” unless you know exactly what is “extra” to spend.
However, if you add up all of your monthly expenses and subtract them from your budgetable income total and you are in the negative, then first of all, you will finally understand why you are in credit card debt. Secondly, you are going to need to adjust your budget so that you are living within your means (which simply means that you are spending less than you earn). Thirdly, if you have reduced your monthly expenses to their bare minimum and you are still not able to bring them under your budgetable income total, then it is time to ask God for creative ideas to generate more income. Remember, He loves to “teach you how to fish” and His heart is that you would never lack, so there is a way through this. Sometimes that way through may mean reducing your car payment by driving a used car, or not eating out as much, or couponing to reduce your grocery budget. These may not sound like fun ideas to you, but if money is tight you need to be realistic about where you are and ask God to help you have joy in being as wise with the resources that He has already given to you as you possibly can.
Now, here is how you practically work this plan. Every month when you earn over your budgetable income total, so lets say you earn $7,000, but your budgetable income total is $4166.67, you will take the surplus money ($2833.33) and put it into your escrow savings account. Conversely, any month where you earn under your budgetable income total you will draw from you escrow savings account to make up the difference. Yes, this plan takes some diligence, but it will also stabilize your income and keep you from ever having to live on credit cards.
In closing, I just want to say that you need to recognize what season your industry is in when starting your escrow savings account. If you are doing well right now and business is booming, this is a great time to start your escrow and begin to fund it every month. If business is horrible right now, you may need to take your government rebate check (only in America ~sorry my South African friends) and fund your escrow account, or your take rebate, or you may need to live on a much stricter budgetable income total (what you are making right now –the low point) until you get into the next season and business picks up and you can begin to fund your escrow account and then adjust your budget.
I so hope all of this has made sense to you. I apologize for the length, but I truly didn’t want to leave anything out because it is the details that make this plan succeed. I hope some of you will put this plan in place and write me back with the details. I already have several friends who have put this plan in place and it has revolutionized their finances. They don’t stress in the low months and don’t have to live on mac and cheese. They feel like they have such freedom and can finally breath when it comes to their finances. It is my sincere prayer that it will do the same for you today.