Thursday, October 20, 2011

Money Matters (Final / Part 4) - Making a Variable Income Steady (and the perks that result!)

 Okay, so I kind of got off track with my Budget Blogging mini-series.  You can find the beginnings of it here:

Intro / Part I (Our Three Foundational Financial Steps) / Part II (Creating Your Budget) / Part III (Money Saving Tips)

I used Part II and Part III to expound on the first financial step we took (creating a budget and finding ways to save in that budget).  The second foundational step, found in Part I, was living a month ahead.  I was going to go into more detail here, but I listed all the advantages and explained it pretty well within that original post, so I think I'll go ahead and just skip to the third/last thing we did in our attempt to manage our finances wisely as a young couple starting out in the big city - making a variable income steady.

Here is an excerpt from what I originally posted:

3.  I am on salary, which is great, but Nick has a variable income.  He can make $5,000 one month and $600 the next.  How on earth do you make a budget around that?  How can you know you will make $3,000 a month when one of you may not bring in enough or bring in too much?  What do you do with the extra money?  This step takes a little figuring out.  You need to look at last year.  We looked at how much Nick made in 2008.  (This wasn't much because he was still in school for part of that!).  We added it all up.  Then we divided it by 12 (for each of the months in the year).  That gave us his monthly AVERAGE.  That is what we said his "salary" was.  Now we were both on salary.  When he made more (which he inevitably did as he was not in school part time in 2009), we took ALL that extra money (yes ALL of it) and created a "slush fund".  Whenever Nick makes more than his "average", we do NOT spend it.  It goes straight to that fund.  Whenever Nick makes less, that's okay cause we have a slush fund to take money from and "top his salary up" back to what it should have been for that month.  And, as mentioned above, this makes it okay even if we have to chase clients for an extra month to remind them they still owe us!  (I will go into more detail in a later post about what we "cap" the slush fund at, and what to do if we made even more after the cap).

The only think I didn't really add on here was "raises".  We sit down each December, and if Nick made more money than he did the previous year, then his salary goes up.  And vice versa, of course.

The Perks:

I'll use this opportunity to do as promised and go into a little more detail about what we do when we reach the "cap".  We chose three months of Nick's "salary" as our cap.  We took Nick's average "salary", which we figured out as stated above (by taking his previous year's earning and dividing by 12), and multiplied it by three.  When we have 3 months of his salary sitting in our slush fund, then we stop sinking every extra penny he makes into there.  (Note:  remember to raise this cap each time you raise your salary!).  We find three months to be a great safety net and enough to cover things when it gets really slow in the winter, or when bigger clients haven't paid their invoices yet, or even when the finishing up of projects gets delayed, and thus, so does the invoicing of them.  We may even consider 4 months in the future when I'm home with kids - God willing.

We only actually cap out our slush fund about once a year just because of the nature of Nick's work.  He makes a ton of money in June, July and August, and comes in under budget most other months of the year.  We normally top it off, and overflow it, in the summer, and then gradually drain it all year long until we reach the summer again.  (Generally speaking - there are exceptions).  June and July normally help replenish it (especially if we have raised the cap amount due a "raise" in Nick's "salary") and by about August, we find we have topped the slush fund right back up again (to three months' worth) and have even extra.  We take that extra and split it in two - half for Nick's business and half for the home.

This is where we find the money for bigger purchases around the house.  It's how we buy a new mattress, or deck furniture, etc.  It goes towards those things in life you want that are just too expensive to really save for otherwise.  You may find a more "fun" use for it, but we think it's fun to be able to buy new furniture, etc.

But we only do that with half of it.  The other half is for Nick's business, but in a fun way.  Business needs throughout the year we just make work because we have to.  But this is where Nick can buy his toys tools for his trade.  Last year it was a new computer.  This year it was new speakers. 

It's a way that about once a year, we can each make big purchases that otherwise wouldn't really be justifiable.

 That about sums it all up I think!  Any questions, just let me know :)

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