What would you do if your your consistent, reliable paychecks suddenly became variable? Would it affect how you budget? Would it make you want to be more diligent about budgeting or to just throw in the towel? How would your spending and saving be different if you didn’t know what your income would look like from paycheck to paycheck?
I know some of you have already been up against these questions. For many, having a variable income is an excuse not to budget at all. Others manage to thrive on a budget even though no two months look the same with regards to income.
We just joined the variable income club.
A few weeks ago, we found out that our income would be changing. We’ve spent the last couple of weeks wondering how it would actually play out. Here’s the history:
Our Old Income
My husband works at a small law firm and makes commission on the work he does (or at least the work he gets paid for). Lawyer work and pay is naturally unsteady. Some matters take a lot of time and work, but don’t get paid for until long after the work was done. Sometimes he sees a few large fees come in all at once. There always seems to be some time-consuming work that never gets paid for at all. Because each month might have a substantially different amount of income, his commission earned each month can vary quite a bit.
In order to even out the natural highs and lows, the firm has paid him on a draw system. He gets a paycheck of the same size each month, his draw amount. His actual earned commissions are tracked and used to set a draw amount. If, over a six-month period, his average earned commission goes up, the draw amount (and thus his regular paycheck) go up too. If the average goes down, the draw is adjusted downward so the firm doesn’t overpay him. Each month he gets a statement of what he has earned versus what has actually been paid on his draw, so he can see whether he is getting ahead or falling behind.
The Change
Now instead of a draw, he will be paid a strict commission, based solely on the actual income of the previous pay period. Twice a month the firm adds up the money received since his last check and pays him his percentage of the total received income.
Our paychecks will vary, probably a lot, depending on what kind of work he’s doing each month and when it is actually paid.
Our monthly debt repayment progress reports (budget reports) will be a little more interesting now! Instead of just seeing the changes in how we spend our money and how much we pay in debt, you will see fluctuations in income, too!
Looking at the Bright Side
Neither of us have ever worked in sales, where pay is often based on commission. We are totally new to this type of financial challenge. An announcement like this can really increase stress and financial panic. We are trying to find some great things about our new situation.
My husband has thought about going out on his own at some point. He is already responsible for bringing in his own work and handling everything for his clients from beginning to end. Dealing with the ebbs and flows of variable income will help us get a better idea of what a solo practice would look like, while still having the luxury of having a paid-for office space, a receptionist, and the other perks of being a part of a firm.
The idea of a commission-based income can be motivating. You are motivated to use your time wisely and take work that pays and isn’t a major time suck. You’re also motivated to get your bills out promptly and make sure that you get paid for your work. You have a greater potential to make more money than with a standard salary.
How Variable Income Affects Our Budget
When we found out the change to variable income was really happening, we talked about how our budget would be affected. My first thought was that we should be extra careful not to put too much toward our debt in case we have a bad month. I figured that we should probably keep a reserve of money for months when commissions were low.
Then it dawned on me.
That’s what we already do! Living on last month’s income is the perfect solution to budgeting variable income. I knew that and have even talked about it on this blog, but in my flurry of worrying and fretting, I had forgotten. We are already on track for success with variable income! We won’t need to make any budgeting changes (at least none that I foresee right now).
Living on Last Month’s Income
In a nutshell, the money we earn in June is not touched until July. At the beginning on July, we know exactly how much money we have to work with. Meanwhile, we save July’s income to use in August.
If June is a low commission month, then our July debt repayment will be low (or non-existent). We will also cut other budget areas as needed in a month after a low income. For example, with a stocked pantry, freezer and food storage, we could go without grocery shopping for a month pretty easily.
If June is a high commission month, then we will have more flexibility with how much we are able to throw at our student loans in July.
For more on living on last month’s income, take a look at this post. When you sign up for my newsletter, you’ll get a “Guide to Getting a Month Ahead Financially” send to your inbox.
The Future
A flexible income will definitely keep things exciting around here. While it might be more stressful as well, it will hopefully give us more opportunities to make strides to being debt-free. We just got the first strict-commission paycheck, based on what he brought in between June 1 and June 15. He had a couple of larger matters that were paid during that time, so it’s a nice check. The check for the second half of the month will likely be smaller. It will be interesting to see how this change affects our debt-tackling abilities!
How about you?
- Have you ever dealt with budgeting variable income?
- What tips do you have for handling commission-based pay?
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Variable income is really tough, but with your low base expenses (free rent, option of not making loan payment) you’re in unusually good shape to handle it. Good luck! I assume you’ve been keeping track of where you were vis a vis the draw — if you average things out over six months or so, was your husband consistently under- or over-performing the old draw? Knowing that will probably be helpful to you as you plan for this.
Great observation! If everyone lived on last month’s income, after savings, no one would have to work past 45 or so. And all landlords would get their rent.
My husband was in a very similar situation (same $$, commission, student debt, etc) as yours a few years ago. After working a year at that type of firm he decided to go out on his own and then took over another attorney’s firm. It has been 100% better! Although it can be scary, you have the budget know how to make it work! Good luck!
That’s good to hear Heather!! I’m so glad that things are working out so well for you! It’s always nice to hear a success story. I would love to hear more about your experience!
We have never been in the situation you describe, so I don’t have any suggestions. I bet it’s scary, especially as you first begin with these variable payments. You won’t be able to trust how much money you’ll receive each month. However, by now you should have built up trust in yourselves to manage the situation, no matter how it unfolds. You are smart, you work together toward goals you’ve set for yourselves, you do not crater easily (we all crater sometimes, at least temporarily), and you’ve also got family behind you.
Thank you Linda! I think you’re right that while we can’t count on how much money we’ll make each month, we can count on ourselves (and one another) to manage it well.
Whew…reading that just made my stress level go up!!! More power to you for seeming so calm! I am a creature of habit and I don’t do well with change when it comes to money, this is why I could never have had a job in sales.
Neither of us are any good at sales either. In fact that’s one of the hardest aspects of the business side of being a lawyer for my husband.
I am SOOOOOO glad you wrote about this Stephanie. It is a subject that I am very passionate about because my entire working life I have had the ULTIMATE in variable income being a server, waiter, etc. In my experience people who bring home cash money every day are the WORST at budgeting. I coined a phrase “server gambling” to describe the lack of financial organization. People will have a great night in tips, spend it all, then have to work 20 extra hours to pay the light bill because their next three shifts were low money wise. Here are my tips for working an extraordinarily variable budget. These have worked for me every time, with one household income, two household incomes, and 1-3 jobs at once.
1-The most important is figuring out the magic number you need to pay your bills, put gas in your vehicle, and buy groceries (you notice I didn’t say eat out) each month. You have to work enough to bring in that amount of money. A lot of servers, bussers, etc. like to take days off when they are “ahead” with money. YOU ARE NEVER AHEAD WITH MONEY! You can always work and save more for later. Always have a financial goal!
2a- work very hard to become a month ahead in income. This is my suggestion, open a second checking account without a debit card. Seriously. If they send you one destroy it. All you need is checks and deposit slips. There is no need to swipe plastic. Every day (or two or three depending on your discipline) deposit whatever cash you made into that account. Do not look at this account until the first. Then sit down on the first and pay bills from the account. It is important to not spend from this account until the first. When you do this you will notice that your income isn’t as variable as you think and it will change the way you look at your job. A lot of servers get discouraged with a “bad” tip. When you look at your income as a monthly whole you will see it varies by $500ish dollars a month most. It will be easier for one bad tip to not get you down.
2b- If you are at a tough financial point in your life try to have a $500 cushion in your account at all times. So that if work completely drops off a week- like some restaurants do when an event is in town- you can at least eat and put gas in your vehicle to get to work.
3- YNAB YNAB YNAB or your form of Zero Based Budgeting. Stephanie turned me on to YNAB, and it improved my budgeting even more. Every penny you make in your job needs a designation. YNAB has actually motivated me to work more, and pick up a second job. When you start to see the categories and the potential then you want money to put in there. BUDGET is not a bad word. It is not restrictive. It is just telling your money what to do instead of your money telling you what to do!
Beautifully put CeCee. Thanks for sharing your great insights! I can imagine that a variable income on CASH would be even more difficult since cash is so easy to spend (as you have seen with your co-workers). For some people, money just “burns a hole in their pocket.” Any “getting ahead” is spent as soon as they get it and they’re behind again. I’m sure it’s a tough cycle to break, but so worth it! A budget really is so much more freeing than being a slave to your job or your bills.
My husband and I have both been self-employed for the last 5 years. To compensate for the roller coaster incomes, we have 2 budget plans we use. Plan #1 is our regular spending plan. It’s what we would regularly spend in a month for basic living expenses and regular deposits into savings, college funds for the kids, and extra mortgage payments. Plan #2 is our skimpy spending plan. It’s about $1000 less than our regular plan and pays all of our fixed expenses (mortgage & utilities) with drastically reduced or zero amounts for variable expenses and savings. We also live off last month’s income, so we know several weeks in advance if we have a skimpy month coming up and can prepare mentally for it.
That’s great to have a lush and a lean plan depending on what the month looks like. I think having the time to mentally prepare for the month ahead is a wonderful part of being a month ahead. It’s nice to not have time to scramble, but be relaxed and prepare.
My husbands income changes weekly, but we know we will have X every single week. Noy exactly like your situation, but it does keep us on our toes. I only plan on X since I know that amount is coming and, however, much YZ is it goes to savings and our debt.
You plan sounds like a good plan to me, and you sound like you’re in great spirits about the whole situation. Hopefully all goes well and you husband gets to go out on his own! 🙂
That’s nice to have a base pay that you can rely on and live off. Having everything beyond X as “gravy” to go toward savings a debt is great!
We’ve lived on last month’s income since we were married 5 years ago. My husband left a full-time salary job to become a freelance web designer a year ago and we were so glad we had put things in place to ease our transition. Things are interesting but a lot less stressful than if we’d be living paycheck to paycheck! I recommend to all newlyweds that they try to get on the “live on last month’s income” system as soon as they can!
That is great newly wed advice! That’s awesome that you’ve been doing it for 5 years!
It also depends what your minimum to “keep the lights on” would be. The minimum that you *have to have* in a month not to substantially impact your quality of life. If there’s any reasonable chance that a month’s income would be below that, you’ll also want enough of a buffer built up to make up the difference. That’s probably rare for you, since you have house/utilities from family, but not for most. If it’s very rare, a healthy emergency fund would do.
I’ll also note that there’s no reason you couldn’t do in YNAB exactly what the law office was doing, if you wanted — budget his commissions as inflows into your Draw category, then budget a negative amount that’s an average of the last six months which then becomes Available to Budget.
Great idea! We could definitely set up our own draw system in YNAB. Right now our “keep the lights on” minimum is pretty low and my side income (blog and Etsy shop) usually covers it. Not having any payments due on our student loans (thanks to IBR) makes that possible. For now I feel pretty confident that we can take the excess from our high months and throw it at student loans without having to set up our own draw system, but I think that is a great idea and might be perfect for others in similar situations without a semi-reliable side income. 🙂
Well that is exciting news! My husband has been 100% commission for the last 7 years. I am a SAHM, so it’s been his income alone. The highs are higher but the lows are also lower. Does his work tend to be cyclical? If so, try to account for that. I felt that 2 or 3 months ahead was better for our situation. He could have a series of paychecks that were low and then a super sized one. I personally would like to get off the roller coaster. (We have also had issues with sloppy payroll, which added to my stress.) I hope this is a win-win for your family! Definitely looking forward to your upcoming reports.
That’s good advice Sarah. That would be so frustrating to have payroll issues on top of it all.
I don’t think my husband’s income is particularly cyclical, but we’ll have to wait and see how it turns out.
I love your attitude about this! Most people would freak out. It wouldn’t be their first thought to increase their savings in case of a low month. They would just hope for the best and end up not paying all their bills if they don’t make enough. Then get hit with late fees! Not ok! I have a variable income, depending on how many hours I work and how much per diem I get (I don’t buy my food while I’m away so per diem is a big part of my income). I still have a guestimate of what I make, on average, and I budget from there. When I hustle, like I’ve been doing the past few months, the extra money is more money to put towards my debt!
I can’t wait to see your new budgeting numbers with your variable incomes!
Thanks Tracie! We are definitely in a better position to handle this than we would have been three years ago when he started. When he first started we weren’t sure if he would have a draw or if the income would be variable.
That is great that you use your per diem for part of your income, rather than using it all on food. I’ve heard of some companies requiring receipts so it has to be spent on food. I think it’s much better to allow employees to be thrifty with their food purchases and pocket their per diem allowances.