Jonathan Cisco

I can relate with you. I’m also a graduate student with a varied income.

Bottom line: If frugal, which you say you are, I recommend budgeting based off of the lower-end of your payscale. For example, if you make anywhere from 2000-6000 a month, budget based off of 2000. (or maybe higher than that if you need to). Doing this would allow you to add major cash to your savings, potentially.

You should feel proud. Not many students can say they have a positive cash flow! Good luck to you!

Kind Regards,
Jonathan Cisco

http://www.dreamingnz.com

Ben

No matter how much money you make, your budget should be how much you need to maintain yourself, the people who depend on you, and your livelihood.

1. Assess what you spend money on.
2. Budget according to what you need to live and work (food, insurance, rent, debt payments, paying yourself first, etc).
3. Maintain a buffer long enough to pay for #2 for 3-6 months.
4. Prioritize your other expenses (toys, vacation, education, etc).
5. When you have money beyond this buffer, plan how you will spend it according to your priorities.
6. Spend your money according to plan!

Again – it doesn’t matter how much money you MAKE, it matters how much you NEED.

Eric

My wife and I started using Budget (www.snowmintcs.com) which handles irregular incomes. It’s a really cool program which uses the tried-and-true “envelope method” of handling your expenses. We’ve only been using it for a month but I definitely would recommend it. It takes some getting used to, but it’s definitely worth it!

laura

As a novice freelancer, I’m in the same boat, so thanks for this question! My modus operandi has been so far to spend as little as humanly possible each month and hope I break even. So far I have, but it’s not been fun. I’m looking forward to a more reliable income…. hope it comes soon. From the comments I think your audience appreciates this type of question, Ramit– can you talk more about saving on a really low or variable income? I bet lots of us are recent graduates who are still trying to find their way in the world and experimenting with different financial paths, and not just the 401k crowd.

MyNameIsMatt

As is pretty obvious from the comments already, know your minimum and have an emergency buffer. Whether you earn an irregular income or not, this should go without much saying.

Otherwise, I’d say feel free in letting go of the control. You don’t have to have your life planned out years or even months if even weeks ahead. That’s the beauty of life, so enjoy the lack of control (through established forecasting/budgeting measures).

The biggest question might be, “I want to buy a house, but how can I plan for saving for that if I just don’t know?” First of, you have a general idea. You’ve got some history which lets you make guesses. If you don’t have any history, then it’s probably too early to think about buying a house.

My biggest question is why do you have to have this figured out? What is the real problem because I don’t really see what the issue is. I think you’re trying to solve a problem that doesn’t really exist, but only exists as a mental fear (”I’m out of control and don’t know what to do”).

MyNameIsMatt

Addition onto my last comment. Your income doesn’t determine your budget. Your lifestyle determines your budget. Don’t plan your life based on what you earn, but based on what you need and want.

Your income determines the probability of success of your chosen lifestyle. So it only seems natural to plan your life around your income, especially as we live in the constant “need more” society, but that would be wrong.

Income has everything to do with options, and nothing to do with expenses. Confusing those two will invariably cause expenses to rise and income to seem out of your control when in reality its your lifestyle that is out of control and your income is out of sync with your lifestyle. Planning by income will either blind your to the short end of the money numbers (only living within what you can expect missing out on true adventure) or on the long end of money numbers (living beyond your means through continual adventuring). In neither case are you leading your own life, but you’ve given up control to your current financial paradigm.

ritayan

I guess too much is being writeen on how-to-save and everything these days. One thing which pays of in any situation is don’t make a hugely elaborate plan for anything. Life is full of surprises and planning too much makes you rigid and inflexible. So try the following:

1) Deduct the least you can save at the beginning of every month and make it a constant amount.

2) At the end of every month look at how much is left in your checking amount?
3) Put a cutoff on your checking account amount which you rebalance at the endo of the month. ie if the cutoff is 400 dollars and if you still have 600 dollars in your checking, transfer the execss to your savings or just splurge with half of it and save the rest…whatever you like.
4) New month…new saving…secure checking!!!

Jesse

There’s no real reason that a person can’t have a reasonable budget with an irregular income. I’m a freelancer myself and have come upon a similar issue. Still, there’s always going to be a minimum. Always. Unless you go without work, which really can’t be planned, fixed income or no.

Know what you can do with that minimum and, more importantly, what you need every month to survive and maintain yourself. After that, it’s just skimming off the top and putting it in savings/investments.

The thing is, I think we attach a little too much weight to knowing *exactly* how much we’re going to pull in every month. For me, the strength of a budget is not that I’ll know how much I can save in a year. It’s in knowing that I’m in touch with my expenses and relative income, which allows me to have a pretty good idea of where my money is going. That’s 90% of a successful budget anyway. The rest is gravy, really.

LeRoy

I would plan in percentages that way despite fluctuations you will be continually saving a percentage of it. For example you could plan to save 15% in a high interest savings account ala ING Direct, and maybe an additional 5-10% of it in something riskier since you are I assume young enough to ride out flucations. Finally as others have mentioned you can utlize a income floor to base your spending on that way fluctuations generally higher than your minimum plans.

Sri

Dono,

Good job on buying the house cash. Buying the house cash is still better than paying interest and any tax advantage.

Am i right?

Carter Adler

I see several possible solutions:

1. Budget based on the lower, fixed portion of your income. All extra income goes into savings/investments.

2. Budget based on a longer period of time. An income that is irregular on a week to week basis, might be very predictable on a quarterly basis.

3. Figure out how much variability exists in your income, and build an appropriate extra amount into your cash reserve.

4. Rather than having your paycheck deposited directly into your checking account, you could deposit it into your buffer savings account, and then set up an automatic transfer from savings to checking for a fixed periodic amount. This automates the idea of a buffer; when your income is low your buffer savings goes down, when your income is high your buffer savings goes up, but you always see the same amount going into your checking account. BONUS: Consider this transfer your “paycheck” and pay yourself first by sending a portion of it to your real (non-buffer) savings.

rod

I also use the excellent “You Need a Budget.” I have semi-irregular income and the program forces you to budget for this month on last month’s income once you have a one month in savings. It makes your income feel less irregular since you know in February how much you have to budget because you have already been paid in January. It uses a modified envelope system which I think is quite effective. Check it out at youneedabudget.com

B-Rizzle-Dizzle

Firstly, OMG! “Large purchases come out of savings…” I thought that’s what savings was for, a cushion for emergencies. If you have to spend it, it won’t be savings. You are not pulling money out of a 401k, so don’t sweat it. I know I saved up for future large purchases, and called it savings.

It does not sound like you have a budgeting problem if you are frugal and put money into a savings account. It seems like your losing touch with Quicken makes you feel like you have lost control of your finances, which is not the case. Being a large expense away from being broke is a fact of life for a lot of people.

If you are a student, this is the way it will be until a stable job presents itself. (after graduation)

If you are a consultant, then consider the ROI and get a different line of work.

If you choose to be in the situation consider the following:

Figure out how much you need to pay for the necessities. Then decide to save or spend what is left over. If you have a large known expense looming, wait until it passes and you have recovered to make some “wanted, but not needed” purchases.

I honestly would not rely on any software to help manage expenses. It sounds like you need to simplify. If you have the money, pay off the debt and do not pay interest on it.

Hopefully you can count your monthly expenses from memory, what is important will not be forgotten over night. If not, then the job is taking too much life energy for a minimal return.

In the end, this seems like an email from someone too blind to see the reality of a situation. It is difficult to set up planned savings / investments if there is variable income and unknown expenses that impact day to day life.

Dono

I keep coming back to this thread to see what others have posted because this is an issue my wife and I have dealt with for many years. I edit textbooks, and my wife teaches aerobics and yoga and used to be a professional dancer. Here’s what I think has worked for us for the past 15 years:

1. Be frugal whenever you can. You don’t need a new TV or car more frequently than every 7 years. Talk to me next year and I might amend that to every 8 years.

2. You don’t need software, but he or she who makes the LEAST money also makes the budget. When you’re bringing in less money than your spouse, you are more likely to budget responsibly. I’ve said “No” to Louis Vuitton luggage, and my wife said “No” to the NBA League Pass until last year.

3 If you are going to go the freelance route, you’re going to go through periods of feasts and periods of famine. ALWAYS bank the feasts. Choosing the freelance path means your finances are inherently unstable. That means you’re not just saving for a rainy day, you’re saving for a rainy year, maybe a whole rainy decade.

James

Occasionally, when all of my budgeting efforts have fallen short, I use a service called Obopay to get money, either in loan form or as an I.O.U. (and the service tracks running balances between friends). It’s a good way to fill in those monthly money-gaps.

Saymorre

This is such a great question. Thank you Ramit and everyone else. I keep checking back for everyone’s input.

candice

>and my spending even seems to increase due to much larger amounts of restaurant food (OMG NO TIME FOR GROCERIES!!1!).

One suggestion I have for this is keep a “sanity fund” item in the budget somewhere. One or two hundred dollars a month to be used (or not) on things like that. Take it out in cash and don’t worry about where it goes, and if there’s something left over, buy groceries out of it. It’s a line item on the budget, so it’s accountable, but not causing stress.

Also, consultant people, make sure you take out money to give to the tax man every quarter. Penalties for failing to file quarterly suck.

splodge

>and my spending even seems to increase due to much larger amounts of restaurant food (OMG NO TIME FOR GROCERIES!!1!).

The solution is the same as for managing your money: plan in advance.

Invest in a small deep freeze.

If you’re no cook, find a friend who is and who(for the right price) is willing to do a couple of pots of things which you can freeze in takeway food containers or freezer bags in one-meal portions. Or – find a source of commercial frozen meals that are palatable and healthy. They’re generally cheaper than restaurant meals and these days, some of them are pretty good. Go for stews and curries. Pasta can be okay too (basically, stay away from meat and 3 veg, it reheats badly). Soups, of course, are perfect for freezing.

Archie

I used to have an irregular income every so often, and the easiest 2 things to do are:
1. Come up with a list of at least estimates of your monthly payments. You WILL know beforehand approximately how much you expect to pay on utilities, rent, any credit card bills. Then factor in about $50 per week for groceries and $150 per month on utilities (upper-level estimates – in NYC, these are fairly valid!) – and so on.
2. Then take the lowest number you are likely to receive and run the above numbers against that. This should give you some indication of how much “spending cash” you might be expected to have left over, in a worst-case situation (i.e., your expenses don’t become less, your income doesn’t go higher). This will give you some starting point of how much to start putting away each month, no matter what. It could be $200 but trust me on this – I’ve found money for $1500 apartment deposits plus one month rent, just by squirelling away that “$200 a month”!!

Over and above everything else – DON’T BE TOO HARD ON YOURSELF!!! Some months just will be crappy, and expenses will pop up out of nowhere. Don’t worry too much.

And here’s the best advice I was given, even if 2 years too late:
1. ALWAYS try to keep an emergency fund (even $500 – yeah, I know it’s a lot!) can make a difference in a bad month)
2. Absolutely, positively do NOT use your CC for any “wishful” expenses. I am still paying mine from 6 years ago!!!

Wa-eazie

I’m 26 and recently joined the ranks of independent consultants after a stint as a consultant at a Silicon Valley software firm which gave me a good underlying skillset and social networking skills/contacts. Those of us who “go independent” know that the financial rewards can be great (I’ve personally seen an increase in income of 100% on an already high “employee” income). Unfortunatly, if you’re young, you may not have the safety net needed to weather a 4 month “dry spell”, so plan carefully!

I’ve not really found that there is any great strategy for how to handle this problem faced by those of us on a variable income. I’ve been working continuously since leaving my “regular job” and have a couple of tips.

1) DON’T put all your eggs in one basket. If it all possible, keep multiple clients, even if they sometimes feel that they could use you more of the time. I often negotiate with my clients to take a week or two off to see another client when I know the requesting client is in a bind, and assure the consenting client that I’ll be there around the clock when crunch-time comes!

2) DO investigate your tax situation thoroughly. I’ve found enormous amounts of my expenses can be claimed back, just by carefully looking at the rules, and speaking with an experienced accountant.

3) AVOID planning vacations like a “regular” employee. By this, I mean just because you may be coming to a client regularly, or even work out of their office, don’t request “time off”. I plan my vacations around times when I know business will slow down or there will be fewer billable days, such as the end of a big project or winter holidays.

4) DO carefully plan your vacations. This one applies to everyone. I love vacations to low-cost locales like Thailand. I’ve found that I can take 3 weeks off, and rent out my apartment in London such that the entire adventure ends up costing little more than the cost of the flight. Check out sites like Craigslist in the US, or Gumtree in the UK for these types of trades, or people looking for short term rentals. **Make sure you have some reason to trust the renter (deposit, or your own insurance). Again, book the travel for a time when you won’t make much money anyway, don’t risk upsetting clients and losing out on that contract!

5) DO buy business cards/website/. Sites like e-lance.com can design software, websites, etc. at very low cost provided you’re capable of designing a real business requirements document for the typically non-business savvy developers working on your project. My $3,000 investments in these has helped me close over $80,000 in business, as well as recruit other independent contractors with similar skillsets into my contact group (useful when you can help a client staff one of them, and make a regular percentage without even working!).

6) When you’re planning your finances, remember why you went “independent” to begin with – you work at your pleasure, and that’s worth something (even if you can’t include it in your budget).

I plan for 40 days off per year (vacations, public holidays, sick-leave). This amounts to about 85% utilisation. DON’T calculate based on a 240 day work-year… it won’t happen unless your client loves paying you overtime that they didn’t budget for!

I’ve not found Quicken, GNU Cash, etc. to be terribly useful when it comes to managing my money. I will say that I’m somewhat excited to see what’s going to be offered by http://www.mint.com’s eventual offering (currently “vaporware”). I end up spending more time documenting and reviewing/comparing these things than taking any pro-active measures. Perhaps irresponsibly, I’ve taken a budgeting approach that is much more broad. I put away for what I have as fixed expenses (including 10% to savings), the rest is budgeted based on spending twice as much on entertainment as I did at University. I also usually throw in a small vacation fund, just in case I decide to go somewhere where I can’t live on $5/day!

My money allocations aren’t as sophisticated as I’d like, as I need to be very liquid and stable in the upcoming 2 years (paying cash for an MBA), but I always know where my money is, and that gives me piece of mind, if not the returns I could be seeing.

Feel free to drop me an email if you’d like to chat about anything I’ve said!

Wael “a.k.a. Wa-Eazie”
welrifai@gmail.com

Pooja

Could you please tell me where I can find YOUR suggestions for the same Ramit?
I’m sure you have it somewhere but I can’t seem to find the post.
Thanks!