Budgeting a must if pay is irregular

Your Money

October 08, 2006|By Gregory Karp | Gregory Karp,Morning Call

Like traditional pensions and full health care benefits, a steady paycheck is disappearing for many American workers.

Instead, millions of people are paid irregular amounts, based on sales commissions, projects finished, seasonal sales or unpredictable overtime pay and bonuses. And last year, according to the Census Bureau, the United States had 9.4 million self-employed people, many of whom didn't receive regular monthly incomes.

"We're living in a world where a lot of people don't get the same number on their paycheck every single month," said Sheryl Garrett, founder of the Garrett Planning Network of fee-only financial advisers.

And that can be disruptive to family finances. For example, someone might correctly estimate they'll receive an average of $5,000 a month, but actual income might range between $2,000 and $8,000 a month. That creates problems when family members want to eat the same amount in February as they do in June.

For many people with irregular incomes, that means living off credit cards until the big paycheck comes in. Then they pay off the credit cards, blow the rest of the money and return to credit cards during the next income drought. That's a poor long-term solution, experts say.

Another aspect of the problem is the personality of people with irregular incomes, Garrett said.

"Folks with erratic incomes - the self-employed, the entrepreneur, the salespeople - they tend to be cowboys and have a gunslinger attitude of risk-taking with their livelihoods and don't tend to budget," Garrett said.

But household budgets are more important for people with irregular incomes than they are for the regular paycheck W-2 crowd. "I'm not a fan of people doing a budget unless they have trouble saving money, but in this case I think it's valuable," said Eric Tyson, author of Personal Finance for Dummies.

Here are tips on how to spend smarter with a variable income:

Make a priority list. Dave Ramsey, author The Total Money Makeover: A Proven Plan for Financial Fitness, advocates developing a budget based on the lowest income you would reasonably expect during a month. It should cover life's essentials, such as food, utilities, mortgage payments and transportation. Then create a prioritized spending list. Any extra money during a month goes to those priorities in the order they appear on the list, whether for spending, saving or investing.

Keep taxes in mind. Many people with irregular incomes pay their own taxes, instead of having an employer withhold taxes from a paycheck. Experts advise setting aside 25 percent to 30 percent of your gross pay in a separate bank account to make quarterly tax payments.

Prepay bills. When you're flush, consider paying some bills early. That could include the mortgage, as long as you specify that the extra money does not go toward principal but toward future scheduled payments, Garrett said. She concedes it's not the mathematically correct thing to do. Ideally, you would set aside mortgage payments, insurance premiums or real estate taxes in a bank account and earn interest until they are due. "I honestly don't find many people who have that kind of discipline with their money," she said.

"Sometimes, we have to trick ourselves into doing what's in our own best interest," Garrett said. "We're very busy people, and we need to take care of things as they come up and as we're thinking about them."

Postpone purchases. During lean months, forgo discretionary purchases until a big paycheck arrives and you can use cash. Delaying the purchase has an added benefit - the impulse might pass, and you might not want the item anymore.

Limit regular expenses. If you live on part salary and part commission, try to structure all your regular and necessary expenses to fit under the salary portion of your compensation.

Shy away from regular-payment commitments and opt for pay-as-you-go. For example, rent movies as you want to watch them, rather than join a club charging a monthly fee, or pay the daily rate for each visit to the gym instead of committing to a monthly payment. That gives you the flexibility to cut back on spending during lean months.

Use bonuses earmarked for discretionary spending on one-time purchases, such as a new television or suit, rather than commitments that require monthly payments.

Spend money after you get it. This is especially true for people who receive large bonuses that make up a significant portion of their pay. Too many things can go wrong in estimating your bonus. You can plan to spend the money but don't commit it until you have the check.

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