A friend of mine emailed me this question concerning her budget that I wanted to share with you today. It goes back to the section I did on income, but I am sure that many have you have very unique pay cycles and I thought this might help you in your effort to set up a budget. This really gives a great example of how you can adjust a budget to fit your particular needs. A budget is not meant to control you, it is meant to assist you, so change it up until it fits the income cycle, bills, and needs of your family. Use my example budget just as a starting place and then adjust it until it fits. Her question was,
“My husband gets paid every Wednesday. He gets 2 different bonuses on the second Wednesday of the month: one bonus is a fixed amount, and the other bonus fluctuates, could be nothing could be lots, it’s all based on if the company profits or not. I am trying to figure out how to do the budget. Right now I have it divided into first half and second half like you said. Our mortgage comes out of his fixed bonus in the second week, according to them it’s not late until after the 15th, but I would have to save a whole paycheck and then some of the next week paycheck to do that differently. I would love to do it like you said about using the last 2 weeks paychecks for the beginning of the next month, but I have no idea how to accomplish that except for having a lot of money up front to get ahead? Anyway, I would appreciate any thoughts you might have!”
OK, if you feel like you have just read a math question on the SAT’s, so did I. However, there is always a way through, so let’s just take it slow and I know this is going to help many of you who have a more complex pay scale. Basically my friend’s income is set up in two ways. Most of it is a fixed salary income, just paid weekly, and even the “fixed bonus” should just be considered to be part of her monthly salary total. The second part of her income is the varying commission check and should be considered as a commission based part of her income. So how do you budget when your income seems so varying and uncertain?
Well, the truth is it is actually not that uncertain. The key is to basically live on your income without the “commission” check since it is the uncertain part. However, since it can be a really great part of your income on months that the business is doing well, you will want to put this check into a saving’s account and then disperse it throughout the year. This is going to require an “escrow” savings account where you pay into a savings account on the months when you do get a bonus and then draw from that account on the months when you don’t. This will help to stabilize that wildly varying 2nd bonus check. It might help to look back at your last 12 second bonus checks and add them together and divide by 12. This will give you an average of that check, and what you can kind of expect over the course of this year. So then you can work off of that number to determine what you have to supplement your salaried income each month. Now if you are in an economical place where you are not getting anything in that second check, you might need to wait until you get a check to begin this section of the plan. However, you are going to have to live without that money regardless right now because it just isn’t there, so this plan will just help you to not have to live at this low point again because through the “escrow” you will get to disperse the money and live on it throughout the year rather than just having a really good month one month.
Another factor to consider is that several times a year there are more than 4 Wednesdays in a month. You cannot base your budget on these months because they are not every month. You have to base your budget on the 4 Wednesday months. So what do you do with these “extra checks” to make them livable income that goes to a purpose rather than just “Oh, we have more money this month!”? The months with 5 Wednesdays in 2008 are January, April, July, October, and December. I think there is one extra “extra week” from my blog on being paid weekly because the year starts on a Tuesday and ends on a Wednesday. I would simply add these “extra checks” into my “escrow” account. For this year I would divide the total (so 5Xyour weekly salary) by 12 and then you could disperse this amount monthly to yourself to supplement your budgetable income. If you end up with a huge surplus each month, just increase what you are putting in savings and spend from your savings and not from your bonus check or extra check. This will keep you from spending what you do not have, and from spending like crazy on “good” months and then suffering in the not as good. It will help your income come to a place of balance as if you are paid a higher steady salary even though your actual income fluctuates.
The next issue is how to manage the “1st of the month” issue in a budget. I just want to say that just because I have put dates into my blank budget example, doesn’t mean this has to be when you pay your bills. Because your entire pay cycle is keyed to the second Wednesday of the month, I would just shift my entire budget from the first of the month, to the second Wednesday of the month (a date somewhere between the 8th of the month and the 14th for 2008) and then your second billing period to the 4th Wednesday of the month which would be the last Wednesday of the month or the second to last on the months with 5 Wednesdays (so that would put the date between the 22nd and the 28th of the month). In other words YOUR “1st” of the month would just start a week later. You have already been doing this successfully because you are already paying your bills, you are just making a plan to make it more successful. So you would then know that on the 2nd Wednesday is when you would sit and pay all of the bills that are going to come due before the 22-28th of the month. And on the 4th Wednesday, you would sit and pay all of the bills that are going to come due before the 8-14th of the month.
So let’s say that you are paid (totally made-up numbers) $800.00 each Wednesday, and then every second Wednesday of the month you get an additional $1000.00 in a fixed bonus amount. So your total “Salaried” monthly pay would be $800 X 4 = $3200 + $1000.00 bonus = $4200.00. In to my budget that I have prepared for you, you would put $1600 into the 1st and 2nd Wed income slot (I have filled it in for the example, but you can change it and put in your actual numbers) and then $1600 into the 3rd and 4th Wed income slot. You would input in your actual fixed bonus amount. Your budgetable income per bill paying period will be $2600 for the 2nd Wed period (because you get your $1000.00 check on the 2nd Wed and need it for your mortgage), and then $1600 for your 4th Wed period.
However, once you get your escrow account set up and functioning, I have inputted what it would look like with the escrow. If you get 5 “extra” paychecks per year, you would take 5 X’s $800 =$4000.00/12 =$333.33 per month which your would draw from your “escrow” savings account each month. And then once you get your 2nd bonus check amount going into an escrow it would look like this: if you made $2400.00 annually through the 2nd bonus check, you would divide that by 12, so $200 a month which you would draw monthly from your “escrow” savings. You could either just draw from your escrow on the 4th Wed and put all of the supplemental income through escrow towards your 4th Wed bill period, or you could draw it on the 2nd Wed and divide the total by two to add to both bill periods. This is the way that it is set up in your example budget.
From there you would just plug in your bills and follow my guidelines for coming up with a budget under the sidebar title “Balancing Your Budget”. I sincerely hope that all of this has helped some of you to think creatively concerning your budget. There is a way to budget no matter what your income cycle. Sometimes it just takes a little bit of problem solving and I am so glad to be here to help you with that (if you would like me to). I can’t promise I will know the answer, but when it comes to budgeting it is my belief that there is always a way through.