An Unpredictable Income
Posted by Gail | Filed under Budgets
I get loads of letters every week from people who do not have a consistent income and can’t figure out how to manage the money they do get. Whether they are self-employed, working on a contract, or earning some considerable part of their income in bonuses or commission, they don’t have a steady stream of cash they can count on from one month to the next. Or their income fluctuates dramatically from one time of year to another.
The economic downturn has also brought a slew of players to the Unpredicatable Income arena: with unemployment up and hours of work and paycheques being cut back all over the place, even people who thought they had a steady income are having to deal with income volatility.
According to the U.S. Department of Labor, 7.6 million people have lost their jobs, and the unemployment rate has doubled, to 9.8 percent in the past two years. Add on the 2.2 million people who are out of work but not counted because they didn’t search for a job in the last four weeks, and the 9 million workers classified as “involuntary part-time” who want a full-time position but can’t find one and the picture is pretty bleak.
In Canada, September brought the first .3% decline in unemployment since the fall of 2008, so our unemployment rate sits at 8.4%. Despite September’s gains, full-time employment has fallen by 395,000 or 2.8% since the employment peak in October 2008.
And now we come to a bible story to help illustrate how people who deal with unpredictable incomes must operate. Let’s turn to the story of Joseph in Egypt. Anyone remember this? Joseph had a dream that lead him to counsel Pharaoh to stock up on grain because seven years of famine were about to hit. Smart Pharaoh took Joseph’s advice. Joseph became the man of the hour.
I’m a Joseph. When times are good, I choose an amount I can live comfortably on, and I stash away the rest of the money. I know full well that a potential famine is around the corner, and I’d rather live simply today and eat tomorrow that gobble up consumables when I’m feeling flush only to whine and complain when the money tap runs dry.
Perhaps it is because I have been self-employed most of my life, and have watched contracts dry up and blow away that I’m so easily resolved to not spending all my money at once. Or perhaps it is because I’m a sensible girl and know that for every up in the economic cycle there is an inevitable down. The reality is that most of us must now get used to income volatility being the new norm and change the way we manage our money.
If you’ve been into conspicuous consumption this may come as quite the shock for you. And if you’re walking around with an albatross of debt across your shoulders, you may wonder how you’ll survive. If the letters I’m receiving are any indication of the desperation being felt in general, we’re not done with this mess yet. As those people who cannot cope default on their debt, that’ll impact not only the dumb lenders who extended too much credit, but the economy as a whole as more and more people have less and less money to bouy up our “consumer driven” economy.
But back to the question at hand: How do you deal with a volatile income.
1. You make a tiered budget that lets you cover your most basic needs in the very dry months, and live a little larger when times are better.
2. You make sure you’re socking away as much as you can when times are good so that you have the biggest fattest emergency fund you can for when times are less good.
3. You think about what you’re buying. Just because you have some money in the bank shouldn’t negate your need to be a sensible and thoughtful shopper. Wasting money on crap is never a good idea, so it’s time to eshew stuff for stuff’s sake, and focus on what’s really going to add to your life.
4. You commit to never again spending money on credit. It’s a trap that springs, cutting off your economic blood supply, when times get tough. Debt is dumb.
6. You do whatever it takes to make the money you need to keep your family afloat. Whether it’s chopping wood, cleaning houses, or walking the dogs of the dopes who have yet to come to their senses, you’ll do as many jobs as it takes to hold your life together.
I’m a sensible, no-debt girl, so I find lean times less stressful to manage. When I’m making good money, I work hard at managing my expectations so that a bumper crop doesn’t leave me feeling richer than I actually am. If I want to lay down new floors in my house, take a vacation with the kids, or buy myself something snappy, I make a plan as oppose to acting on impulse. While it can be pretty tough to stay off the consumerism treadmill, I find that managing my thoughts about how much money I do or don’t have is just as important as managing the money itself.
November 30, 2009 at 8:50 am
We face this problem, but on a much longer scale. Because of the posting cycle, we could be going to one income for 2-5 years a time, come back to Canada, have two incomes again, and then go back to 2-5 years on a single income.
My best strategy to manage this so far has been similar to what you’ve suggested. We’re very close to living off of one income right now even though both of us are working, and trying to stash away everything else into a gigantic emergency fund and a healthy retirement fund for hubby (he won’t have the same pension eligibility since he’s going to be on unpaid leave for 2-5 years at a time, multiple times before the end of his working life). Both of us have also taken on extra work (overtime and tutoring university students) to add to this.
We’re in a good place right now though, since we’re young, energetic, and don’t have kids yet. I worry though about what it’ll be like in a few years when there’s so much more demand on our finances.
November 30, 2009 at 8:53 am
I have been working a job, transport driver, that has a largely varying income, for 8 years now. While the first 2 years were mainly steady, the last 6 have been a challenge. And of that, the last 3 years have been tougher still. The area where we live actually has an unemployment rate higher than the national average.
This spring when we were put on even further-reduced hours, I sat down and calculated an average week’s hours and then cut back on that. Our budget was trimmed, and we’ve managed to still add to our EF. Last week I worked almost 10 hours over my ‘average’, so that will all go into the EF.
Thankfully, hubby and I are not big spenders. We have a well stocked pantry for those times when the money is tight, and we enjoy having company or visiting rather than dining out. We managed to ‘holiday’ this year… if you can consider tent camping a holiday.
Living on a varied income can be done, but there are sacrifices that are made. And if you are disciplined enough, you can still buy the things you want, rather than only the things you need.
November 30, 2009 at 9:12 am
Even though my income is very steady and stable, any overtime I make goes into the emergency fund. It is bonus money as far as I’m concerned and so it can sit in the emergency fund till it’s needed.
We do need to be better at making a plan. Those rules above work for anyone on any income. not just the variable income folks.
Regards,
Jason
November 30, 2009 at 9:30 am
Well said!! We aren’t big spenders but have friends that are. Some are starting to feel the pinch of less $ and scrambling to pay some bills.
I went back to school while working f/t after passing and landing a p/t time I was able to quit my f/t shift work job. I had socked away a bit just in case but have reduced spending (not hard seeing as we don’t need very much) I went over all of our household bills and made changes to the phone bills and will be saving $45-$50 a month just with that.
We raise our our own meat/eggs so our grocery bill is VERY different from others we know. A friend and I were talking about how much we spend on groceries per week, they spend $200+ a week, we come in at about $75 a week both households of 4. Then again we pay for animal feed but the egg sales help in that respect:)
@ Colleen-”Living on a varied income can be done, but there are sacrifices that are made. And if you are disciplined enough, you can still buy the things you want, rather than only the things you need.” I couldn’t agree more! I just bought myself a horse trailer not because I NEED one but because I WANTED it and could afford to buy it for myself.
November 30, 2009 at 9:46 am
I have been self employed for 9 years now, as an IT consultant. We save a lot in rrsp & a self-directed pension, spend less than we make & have only mortgage debt. My issue is that essentially our income depends on how much I want to work. So I have trouble limiting my hours so that I still have family time & de-stress time. I have a fear of that future day when the contracts dry up & there is no work. How do you ‘decide’ on an income that provides enough savings for downtimes but also ensures that you aren’t overworking? What kind of EF is realistic for a consultant? Its the advice ’save as much as you can’ that causes me to work 10 or 12 hour days.
November 30, 2009 at 10:21 am
Thanks Gail for the great post ! This one was for me – I’m a self-employed, work from home, Massage Therapist and have been having trouble on setting a budget due to the fact my income can change weekly (even daily with those nasty last minute cancellations). I have finally just started with a number and am working with it. So far so good. I will need to tweak it as time goes but from what I understand that is inevitable. I’m on the right track though. I liked the analogy you used – soooo wise !
Thanks
November 30, 2009 at 10:22 am
To Kerry: It’s great that you have a plan in place and are a hard worker. One of the ironies of human nature is that we crave security and guarantees but life’s only promise to us is to NOT give us these things. We do the best risk mitigation that we can but eventually you have to give up the control and trust that the sun will rise tomorrow, with or without our savings. You should know that what you have is beyond an emergency fund, you have the strength, courage and drive to take care of your family and that always works out in the end.
How our budget reflects a variable income (on call hours): I added a carry-over category to the spreadsheet. Any extra money from one month that was above all the planned spending is carried into the next month to cover a potential shortfall. In essence we have a “float” in the bank account. This is a very good visual to show how we are doing.
November 30, 2009 at 10:42 am
Great post, Gail. I totally relate to this one–I’m self employed, work from home and have had trouble balancing it. One of my contracts pays quarterly. Its taken some time to sort out how to stop the “feast to famine” cycle. As a result we do carry some debt that we are working to pay down.
A balanced approach works. For me its a matter reminding myself of the bigger picture to stay focused in the “feast” times.
November 30, 2009 at 10:53 am
Good post Gail.
I am going through this now as my work contract will not be renewed. (I’m currently at your #6 remark.)
I have a safety net in which I built. I’ve been tempted to use on a new bedroom set, painting the home, etc. but I could not risk this especially as I am a single dad of 3.
Side note…have you seen this video feature? I wonder if you can comment on the feasiblity of this for the Canadian market?
http://abcnews.go.com/GMA/Parenting/mom-feeds-family-week/story?id=8463295
November 30, 2009 at 11:38 am
Thanks for the great practical tips and the fable to illustrate it so well! We are considering an entrepeneurial opportunity for my husband, and this will inevitably lead to the inconsistency you’re describing above. I’ve gotten so used to a set income and systematized our finances accordingly, so there will surely be a period of adjustment if he pursues this opportunity, but I think being on the “Gail program” for a while now will help us a lot, as we have a really good sense of what our expenses are, and we have saved and eliminated much of our debt (just a car loan and mortgage left to deal with).
November 30, 2009 at 11:44 am
[...] the rest here: An Unpredictable Income « gailvazoxlade.com This entry is filed under Art, Income. You can follow any responses to this entry through the RSS [...]
November 30, 2009 at 11:55 am
@ silverss – I have heard and seen many similar stories to this all coming from the US and have often wondered the same thing. Everything I have looked into and heard gives the answer “no – you cannot do the same thing in Canada”. Coupons are just not created the same here as they are down South. Unfortunate but true.
November 30, 2009 at 12:10 pm
This post really resonates with me as I have been self employed for the past 12 years.
How I am weathering the ups and downs of the economy is through “pretending that next year is going to be harder” and adjusting my budgeting spreadsheets accordingly. It also helps me see where I can voluntary trim back now.
If I do better, then the extra money is considered a bonus and is divided in half for my husband and I. If I don’t make the projection, then I have money set aside in an account to make up the shortfall.
November 30, 2009 at 2:16 pm
Thanks for the post on this topic, Gail. We’ve been living on self-employed income for some time now, and while we didn’t get ourselves into huge trouble when we were just ‘drifting along’, it wasn’t for any good reason: hubby and I are just conservative (financially) and not into spending to impress. But things are much better now that we have a Gail-like budget and a plan!
Kerry–boy, do I relate. One of the hardest things about self-employment is that time taken off ‘costs’ the family; a weeks’ vacation is not just the travel-and-hotel costs, it’s also a week of lost pay; it’s lost pay when hubby is home for a sick day; conferences and schmoozing are important for his career, but conferences again cost us not just in terms of registration and travel expenses. In terms of finding some balance, we never had been able to until Gail. We now have a budget, including savings and planned spending (house renos, vacation, gifts and Xmas, etc.) Hubby and I sat down and talked about what our own comfort points are–how much of an emergency fund? How little left on the mortgage? How much of a ‘float’ in the business account? How much would we need to make our bills on a bare-bones budget? How much to live a balanced and satisfying life? The numbers we determined seemed a long ways off, but by being so much more CONSCIOUS of what we are spending our money on, and setting up those beloved automatic savings transfers at ING, we may well be there within a year or two. At which point, we are going to move to a system where we know we need X dollars per year to live a happy balanced life (some travel, still savings, etc) and that will determine how much to work. So he’ll be in a position, once the bills are met for the year, to work only on those contracts that interest him, or perhaps forgo work after a certain point in the year and take a stab at writing, or developing a custom software product, or whatever floats his boat.
Hope this all doesn’t sound too sexist either; this division of labour works well for our homeschooling family (I am a former teacher). We’ve got disability on hubby, but if anything seriously awry should happen, I am more than happy and capable of finding paid work as well. I totally agree with Gail that you do whatever it takes to pay your bills. But right now we are doing better as a family with him earning and me managing the money, than we did with both of us earning (and spending!) and no one doing the planning. YMMV.
Kerry, I also recommend the book _Why Swim with the Sharks_ to get a handle on how much you need to save for retirement. (nb. The book is for Canadians) Though it is not common, there is such a thing as saving too much, and working too much for tomorrow instead of for today.
November 30, 2009 at 3:59 pm
Great post Gail – interesting comments.
Heidi~run, do not walk to your computer and make up a sign to post stating that your fee will be expected if you are not given at least 24 hours notice.
November 30, 2009 at 5:05 pm
My husband has been self-employed for most of his adult life. We learned these rules early on. We also found that if we could set ourselves up to withdraw a predictable amount from his company, it helped our personal accounting. Keeping the two separate except for that monthly draw meant that we weren’t spending business money just because we had it, and ensured that we stuck to our budget.
November 30, 2009 at 8:55 pm
silverss and Jessie:
Couponing here in Canada is not as good as the U.S., but you still can get plenty of products for free or nearly free. London Drugs will allow you to use multiple coupons as long as the bar codes are different. Superstore allows both a store coupon and a manufacturer’s coupon for a product. Other stores have special double coupon days. Check out some of the stories on http://www.savemoneyinwinnipeg.blog.ca
November 30, 2009 at 11:43 pm
Some great ideas. One area that needs to be covered is investing. For example, if it retirement investments, you can be a little more patient; however, if it is day-to-day investments, I’d encourage people look at 5% investment strategy I share. It creates free cash flow within usually 3 days, and allows for capital protection.
Always keep a cushion, but don’t be afraid to invest in the markets and make money in the meantime.
December 1, 2009 at 12:07 am
Risa thank you so much for the post, I will definitely look for that book (at the library of course!). We do have a very similar situation and did try to set out kind of a ‘target salary’ but it is just SO hard when you have the opportunity to work some additional hours, pay a bit more on the mortgage, etc. Our financial planner has us retiring at 50 which I don’t even want to do, I would much rather work a little less now & work a little longer later, but I can’t seem to relax.
December 1, 2009 at 12:29 am
@ Risa, your plan sounds similar to mine.
I am self employed with contract work and it is very seasonal, market sensitive and tempermental for hundreds of reasons (freelance graphic design). I have a steady client set, but when their client base shifts, my income does too.
The way we combat this is relying heavily on my husband’s steady income. Essentially all of our fixed expenses and necessary variables MUST fit within my husband’s income. My income goes to the “extras” like building the emergency fund, dealing with planned spending, and one particularly busy year I was able to contribute a lump prepayment on the mortgage! Sure it means we can get some of the extras in life too, but we are comfortable knowing we can drop them all at a moments notice (and we do!) We avoid debt fiercely for the precise reason that we don’t know what I’ll be bringing in from month to month and always budget for my income to be $0 just to be sure!
It sounds like we have all our eggs in one basket (my husband’s job), but my income is also the “back-up plan” ready to kick into high gear if something happens to his income.
It’s been well orchestrated to work for our lives; I get to be there for the school age kids, we have more liquid income options and my skills stay up-to-date in case they are needed more seriously!
December 1, 2009 at 7:33 am
Silverss, Jessie, Tessa:
One thing with couponing so much is that when looking at when they came in, did you notice that they walked straight past the fresh fruits and vegetables? Of course you can get canned and frozen, but I didn’t see much in the way of canned fruits in that pantry.
Personally, I wouldn’t want that much processed food in my diet, and that’s all I ever see coupons for. I do buy some processed food, but it’s not all that is in our cupboard.
Also, I’ve never seen a Sunday paper full of coupons – do those exist in Canada? I only ever see store flyers, and coupons on the shelves (or being given away by product demonstrators)
December 1, 2009 at 3:08 pm
Great post Gail! I started working for myself 19 months ago and was initially mixing the money with my husband and I’s personal accounts. It got to be too confusing to figure out what was “business” money and what was personal that I started withdrawing a “salary” a few months ago and leaving the rest in a seperate bank account.
This has helped with the accounting and also making sure we’re not going crazy in good times and searching for pennies in the couch when things are a bit slow.
Set it and forget it! That motto has saved me more than once already
Thanks for this great post. I’m hoping to stay in the “self employed” category for a few years as it totally suits my lifestyle and personality so hopefully these methods you’ve mentioned will work for me and I’ll be able to stick to them!
December 7, 2009 at 3:40 am
i have the opposite problem as Kerry, i’m self employed with the ability to work as much or as little as i want. i find it difficult to work beyond covering my basic needs, it is “work” after all and i’d much rather be doing things i enjoy more such as relaxing, hobbies, exercise, self-care, spending time with friends and family etc. i work enough to cover my basic expenses and a small cushion, i have no idea what i need to retire on and how much additional i’d need to earn.
i envy those who have the motivation to just keep on working and working long hours….my job isn’t terrible but i’d still rather do other things.
May 4, 2012 at 1:53 am
consider using it in your business today….
even if you’re not a technical person, you can still use google adsense. the fastest way to start earning money with google adsense is by getting a blog, and marketing your blog to get more traffic to it.there is no technical…
May 9, 2012 at 10:44 am
if you go randomly into a crowded…
street and start shouting about how great your it services are, people will almost certainly stop and stare. they’ll do this not because they’re interested and want to buy your it services, but more likely it’ll be because they think you’ve…