I am a stay-at-home mom and my husband works based on commission. I have been trying to work out a budget rather than living paycheck to paycheck, but am not sure how to budget when his checks can vary up to $700 per check. (He gets paid every other week.)
Some months we have a nice surplus, and other months we borrow from our savings to make sure our checking account stays out of the red. We don’t usually have a problem paying our monthly bills and usually can save a little, but are really hoping to pay off some credit card debt and our car. Any suggestions are appreciated! – Casey
Budgeting on a commission or variable income is very doable. In fact, my husband and I have never had a fixed combined income our entire married lives! Here’s what I’d recommend:
1. Create and Follow a Barebones Budget
In my book, I outline a step-by-step plan for getting on a budget. First, I encourage people to learn self-discipline through setting up a grocery budget. Once you’ve practiced the discipline of creating and sticking with a grocery budget, I encourage you to move on to developing a Barebones Budget.
If you’re already somewhat familiar with budgeting or already have a grocery budget in place, I’d encourage you to jump ahead and create a Barebones Budget. This will include all of your basic living necessities: food, basic utilities, shelter, and transportation. In your case, you’d also want to include your credit card bill(s) every month, too.
Write all of these budget categories down on paper and decide how much you need to set aside every two weeks to adequately cover all of the expenses. If there are any expenses you can lower by cutting your grocery bill, asking for a discount on your utilities, moving to a less expensive housing situation, or selling your car, I’d highly encourage you to do it temporarily in order to free up more money to save and pay off debt.
2. Build Up An Emergency Fund of 3-6 Months’ Expenses
Once you have your Barebones Budget in place, begin following it to a tee. As much as is possible, don’t pay for anything that isn’t a complete necessity right now. It’s a short season and your sacrifices will pay off. Instead, throw every extra penny you can toward building up your emergency fund to three to six months’ of barebone expenses.
Depending upon how often you are dipping into savings would be the determining factor for us as to whether to only set aside three months’ of expenses or to go ahead and set aside six months’ of expenses. This will then give you a cushion going forward on months that you come up short.
3. Pay Off Your Debt
After your emergency fund is full funded, it’s time to focus all of your energies on knocking out your debt as quickly as you possibly can. Continue to live on your Barebones Budget and put everything else that you can scrounge up toward your debt.
Be as aggressive and as creative as possible in attacking your debt and getting rid of it. The sooner it’s gone, the sooner you’ll be able to have some breathing room in your life again!
If you have some hiccups along the way — and you probably will! — don’t be discouraged. Stop and re-fund your emergency fund, if need be, and then get back to getting rid of your debt.
4. Create a Prioritized List of Additional Savings/Spending Goals
Finally, once your debt is gone, make sure you have a fully-funded emergency fund of at least 3-6 months’ expenses, and then create a prioritized list of additional savings and spending goals. Use this list as your guide for months when you have extra: put the extra toward the first thing on your prioritized and slowly start working through it.
If your debt is gone and you have a good emergency fund in place, you’ll have a lot more breathing room and will not only be able to put more into savings, you’ll probably also be able to enjoy some strategic splurging, too!
What advice and tips do the rest of you have for successfully budgeting on a variable income?
Try to set up a budget based on a year gone past. For example my hubby and I have decided our bare bones budget is about $58K and his earnings over the last three years have landed at right about $70 something K so we went with mid 70 something budget.
This has worked for us for the past four years but we must stick to it.
Everyday! and it is tough.
Great discussion and tips~ Thanks:)
My husband is commission as well. He gets a draw on the 10th and then the main check on the 25th. What works well for us is to have a budget that goes from the 26th of the month thru the 25th of the following month. No one says your budget has to be on a calendar month. That way, we get his paycheck and we know how much his draw will be on the 10th, so we know exactly how much to budget with for the following month. It has helped us a lot!
These are great tips and it’s exactly what we do (as I get paid 100% commission).
You must know what you NEED to cover all of your monthly bills and living expenses (food, eating out, etc). Once you know that amount then you have the baseline of what your husband needs to pay himself each month. So if you discover he NEEDS to bring in $3000/month and one month he brings in $4,000, then you’d set the additional money aside in that 3-6 month E-fund Crystal was talking about. That way, if the next month he only makes $2,000, then you have that extra $1,000 to supplement his short-fall and your budget doesn’t know/feel the difference.
I like the 3-6 month emergency fund, but considering I’m 100% commission we’ve chosen that 12 months of “my income” (what I need to pay myself) is more comfortable for us.
We have a varied income as well, as we are both self-employed right now. (Frankly, I would rather just get a normal job, but that is a process.) Anyhow, what we did was to put ourselves in a situation where we are living as cheaply as possible. (We actually emigrated to make that happen, although I realize that is an extreme step!)
Once our living expenses were minimized, we used Elizabeth Warren’s 50/30/20 plan, as modified. First we put 30% of any checks received into savings, for taxes. With what’s left, another 20% goes into savings for SAVINGS. 30% is split between us for “spending” money, defined as everything we spend money on during the month except for rent (utilities are included at our house), gasoline, and 1x/week grocery shopping. The remaining 50% stays in checking for rent/gas/basic groceries. Some month we have extra and it just carries over, and that tides us through the months when there isn’t enough.
But it took getting out of debt and minimizing our expenses first.
My income is half salary and half substitute teacher pay, which varies depending on the needs of my school during a given pay period.
One of the things I do to help manage this fluctuation is I keep a running list of items that I legitimately need but do not need immediately. For example, this list includes things like a new cheese grater (I ruined mine, go figure) an Ipod (I don’t have one) and my grad school books for this summer listed individually. I also keep a bare-bones budget. Once all my bills are paid and my money is allocated to savings I look at what I have left over and then go shopping from my list.
The list itself has the item, a price, and a due date (like my grad school books. I can buy them early, but I can’t buy them late). Some pay checks I don’t get anything extra off of my list, some pay periods I can take care of a bunch of the legitimate things I need but don’t need right this instant.
I’ve never had variable paychecks but I did once work for a company that issued rubber ones. My first job out of college my boss would play this transfer game with the payroll account that guaranteed my check would bounce. And sometimes the check would bounce 2 weeks after I deposited it. My boss would always pay the fees but she was wreaking havoc with my credit rating. My solution (besides looking for a new job) was to start depositing my paychecks into savings and then have my savings account make automatic transfers into checking based on my budget. I had to live pretty cheaply for the first couple of months to get ahead enough–you need to be ahead by at least half your monthly expenses for this to work. But after that it’s a nice, automatic way to build your savings.
We are not paid on commission but our hours (and therefore our paycheques) can vary widely at different times of the year. There is a minimum amount that we make and our budget is based on that. If something exceptional happens and we aren’t even going to make that ‘barebones’ amount then we figure something out to make up the extra money (ebay selling/ side job.. whatever). Everything that we make on top of this amount goes into paying down our mortgage. I posted about how we do it here: http://preservingpennies.com/how-we-budget-simple-and-easy-to/
My husband has variable income as well. I’m curious to know if you say to save 3-6 mo living expenses before paying off debt due to the variable income?
I know Dave says the $1,000 Emergency Fund, pay off debt, THEN save the 3-6 months living expenses. So I’m checking if you feel the 3-6 months is more important to do first with a variable income.
Yes, if you’re dipping into savings on a regular basis to cover things when the paycheck is smaller, I’d suggest beefing up the emergency fund before paying down extra on debt. That way, you have an extra cushion in case you have a few consecutive months where the paychecks are smaller.
Thank you, Crystal:) We’re praising God he FINALLY has a decent income but oh the messes we have waiting for us to clean up;)!
I’m praising the Lord with you! And just keep plugging along, plowing through the messes one step at a time. You can do it!
Thank you:)
This is a great post! My husband was self-employed for several years and having the large emergency fund saved us more the times that I can count. We went one step further and actually created what I would call a “overflow fund.” Any money left over at the end of a good month was put into the fund to manage the months that were a little short. We were able to buy a house, pay off several loans, and keep on top of all of our other bills without draining our emergency account.
Very good post! My husband is paid commission and is paid only once a month. He’s been paid this way for at leas 25 years. When he first started this job I averaged several months of income and budgeted just below the average. Having an emergency fund is key to making it work…and of course following a budget!
My husband is self-employed, and although he is not on comission, he is paid hourly, and his hourly rate can greatly vary depending on the client and project. We’ve set up our budget based on the low end of what he is likely to make, and when he has a better-paying project, we take the extra and use it for savings, retirement and a little bit of travel and play. We are comforted in knowing that we can take that (inevitable) pay-cut as his projects change without having to change our lifestyle. I would suggest you look at last year’s worst month of income and use that as your baseline budget that you follow every month. All the other months that are better income can be used for debt repayment, emergency fund build-up and eventually playing! This way, you won’t have unpleasant surprises when he has a low month, only good surprises when he has a good month!
This is my suggestion, as well. Figure out a way to make ends meet on the low months.
Thanks for the question and the detailed information as we live very similar to Casey’s family……we are striving to get our emergency fund set aside now. This month (April) we have started a 30 day challenge of only spending money on items needed….food, housing, utilities, car note, gas. Of course we are staying on our monthly budget. So far so good:)…..and if we spend anything other than budget….we are to write it down and hopefully this will help us track how to spend our money better.
Then after end of month we hope to have money leftover that we can put toward our emergency fund.
Love reading your blog and getting ideas from others on this very subject.
Cindy
We have the same, we try to average but unfortunately some months it just gets us by and there’s no improving debt, saving extra or stocking up because it’s just not physically possible that month. Commission is simply not a fun way to be financially sound(unless of course you make killer money on commission and the only change is SUPER awesome or just awesome…lol! Ours is just “livable” or “what can we do without to make this livable”)
My husband and I both have variable incomes and I make our budget based on the average of our monthly incomes. It isn’t perfect, but it works pretty well for us.
This sounds very much like some of they the Dave Ramsey steps in Financial Peace University – a class I’m taking right now that is helping me do all of this. There are more tips in his book, Financial Peace, and he has a website, too. He has some video lectures in the class (mine is taught at my church) that go over all kinds of things, from saving on purchases and a crash course in investments. Best class I’ve ever taken, and very very motivating.
My husband only gets paid once a month and it varies. What I’ve found works best for us is to live one month ahead. We get paid on the first of the month but don’t use that money ’till the next month. This way I always know what I have available a month ahead and can budget accordingly. (We have no debt so on tight months we live on the bare bones budget and then on better months we can “splurge” a little…also this allows me to do some shopping ahead for groceries on the good months when I know we have a bad month to follow.)
We do this too- live on last month’s income. I love it because I never have to worry about spending money that we don’t have and we can plan ahead. The months that we have more, we put more into savings or other fun items and the months that we have less we just focus on the basics.
This is my suggestion also. Always use this month’s income next month.
Also, have finance meetings with your spouse or budgeting partner regularly.
This would also be my suggestion. In Crystal’s steps, this would basically be between steps 1 and 2. Before doing the 3-6 month emergency fund, save up one month’s worth of expenses in your barebones budget so that you can eventually switch to using this month’s income from next month’s expenses. This is really easy to track if you use YNAB software for managing your budget.
I think those are all excellent tips.
It really boils down to planning in general!
Having a full year of commission based income under my belt now has really enlightened to me to just how variable it can be. It’s so different from traditional income, and it can be tough to wrap your head around!
So I say, expect some bumps in your planning/spending that first year and keep impeccable records. It won’t always follow the same trend, but as long as you build up your emergency fund, you can be prepared for when things go against the “norm”.