Budget for Irregular Income

Most people with irregular income think it's impossible to budget with a changing paycheck. The truth is, it is not impossible, it just takes better planning. The easiest and most functional way of budgeting for inconsistent paychecks is via the Two Checking Account method.  This method creates a separate account just for your fixed monthly expenses, and uses the other account for monthly variable expenses that are more controlled.

How To Approach an Irregular Income Budget:

1. Calculate your average paycheck from the last 3 months. If you are paid weekly you will average out the last 12 paychecks. The goal is to set a baseline for income.
1. EX:   Bob had 6 paychecks in the last three months that averaged $1,473.50

2. Calculate your monthly paycheck based on your paycheck frequency
1. EX: Bob gets paid twice a month (1st and 15th) his average month is $2,947
2. Add any additional monthly income you might have (interest, rental income, etc)

3. Make a list of all of your Monthly Bills. I call these your monthly obligations - expenses you have each month that hardly change. Examples Rent, Mortgage, Utilities, Cell phone, gym Memberships,  Credit Card Minimums, Loan Payments

Rent	$    670.00
Cell	$       65.00
Utilities	$    124.00
Cable/Internet	$       78.00
Student Loan	$    228.00
Car Loan	$    326.00
Insurance	$       87.00
Visa Card	$    127.00
Gym	$       32.00
Total:	$ 1,737.00

4. Divide Total Obligations by number of paychecks in the month
1. EX: $1,737 / 2 = $868.5
2. This value represents how much you will need to save from each paycheck to cover all of you Monthly Obligation expenses

5. Budget Remainder of Monthly Paycheck with Remaining Categories
1. $2,947 - $1,737 = $1,210.00

Savings	$    100.00
Groceries	$    265.00
Shopping	$    200.00
Entertainment	$    250.00
Restaurants	$    120.00
Personal Care	$    100.00
Home Supplies	$    100.00
Misc Expenses	$       75.00
Total	$ 1,210.00

6. Create Paycheck Rules

Paycheck rules are set dollar amounts that will be taken out of each paycheck to cover the monthly obligation expenses and saving goals.

1. Ex: Bob's Paycheck Rules
• $868.50 will be transferred to the Secondary checking account
• $50.00 will be transferred to the savings account

Things to Note

1. It is very important that you pay your monthly obligations from Checking Account #2, and use Checking Account #1 for other monthly items. The goal is to always know you are covered for your monthly expenses even if your paycheck dips below average.
2. When in doubt - Underestimate Income and Overestimate Expenses

3. If your income varies based on time of year, you should readjust your budget averages each couple of months. It is also advisable that you put more into checking #2 than the minimum as to create a buffer

4. In the event you have a much larger paycheck than average (Way to Go!) create a plan for the excess amounts. Set  percentages for the extra money based on saving, debt, or personal needs.
1. EX: Bob had a great sales period and his paycheck was $2,474.50 Bob's plan for the extra $1,000 is:
1. 40% to Savings  $400.00
2. 20% to Car Loan $200.00
3. 20% to Checking #2 - $200.00
4. 20% to Fun Trip - $200.00

Personality Types and Money

Being a budget coach, I've come across different personality types when it comes to money. It seems some can handle the rules of staying within a budget and others fail within weeks. One possible reason on why some can stick to budgets and others can't is rooted in their fundamental personality type. Myers Briggs is  one of the most popular categorization of personalities. It tries to divide a population into 16 categories, based on 4 dichotomies.

Extrovert vs Introvert - Describes from where people draw their energy.

Sensing vs Intuition - Are information gathering functions; describe how new information is understood and interpreted.

Thinking vs Feeling - Are decision making functions. These functions are used to make rational decisions from either the mind (thinking) or feelings.

Judging Vs Perceiving - Describe how one relates to the outside world.

These 16 personality types are then grouped into 4 broader categories:  Artisans, Guardians, Idealists, and Rationalists. An Income Assessment done by the Career Assessment Site shows that of all of these personality types Rationalists scores the highest average household income.   ENTJ's are highly driven take charge people, thus majority of large Corporate CEO's fall into this category. Idealists, on the other hand, and especially those who fit with the INFP description (highly compassionate and focused on making the world a better place) are less likely to cash in on their traits. These INFP types are the world's Musicians, teachers, and writers. It does make sense that certain personality types are drawn to certain careers, and thus help determine earnings potential and success with money. Different personalities require different approaches to handling money.

Artisans ( ESTP, ESFP, ISTP, ISFP)

Artisans love having freedom of choice  and will be highly spontaneous in nature. They are focused in the here and now of enjoyment. Since they’re characterized by a tendency to be compulsive, and are unlikely to think long-term, Artisans are often carefree when it comes to spending, and not concerned with saving for the future.

Money advice for Artisans -best way to approach money is to have a simple system of budget tactics such as auto draft of paycheck into a savings account. Artisans don't want to deal with Spreadsheets and formulas. Simple is always better. The Envelope system will benefit Artisans for controlling spending.  

Artisans make up about 38% of the population.

Idealists (ENFJ, ENFP, INFJ and INFP)

These folks take money personally and see spending as an extension of themselves. Idealist want to be happy, and want those around them to be happy. They are concerned about the emotional needs of themselves and others. An Idealist can be found constantly picking up the tab for friends, or buying expensive gifts for family members.  They may even overspend on themselves with the thought process of "I'm worth it".

Money advice for  Idealist -  the best way to handle money is to come to terms with "Quality is better than Quantity". For example: Spending time with someone for free can be just as rewarding as buying lavish gifts. They need to focus on the long-term happiness of saving vs the short term fulfillment of spending. Visual aids such as Saving Meters will help Idealists.

Idealists make up about 12% of the population.

Guardians (ESTJ, ESFJ, ISTJ and ISFJ)

Guardians are conservative on change but didactic in preparation. They think ahead, make sure their future is taken care of and are consistent with their spending. Even though these people are very good at budgeting, they are fearful when it comes to investment risk. A Guardian will most likely put money into very stable investments over taking acceptable risk. A 1% return in a savings account, is better for them than a potential 10% return in stocks. Dealing with unpredictable negative situations such as a job loss can throw a guardian into chaos.

Money advice for Guardians - Extend your emergency fund and savings from 4-6 months to 6-8 months to better deal with security.  Balance your risk with your age when it comes to investments. A young Guardian can survive the market ups and downs and end up ahead investing in stocks over "safe bets" of bonds.

Guardians make up about 38% of the population.

Rationalists (ENTJ, ENTP, INTJ and INTP)

The Rationalists have a no-nonsense, logical approach to decision making. Their greatest strength is strategy and will focus on long term plans and investing.  The iNtuition part of their personality will drive them to trust themselves and choices. A Rationalist will spend money based on their own analysis, not others.  Which means in relationships, the Rationalists may be overtaking the money decisions causing a bit of contention.

Money advice for Rationalists - Loosen the purse strings and let your partner have a fair share in money decisions. (Even if you think they are wrong) Create a "Fun spending" Account that will allow you to enjoy money while knowing your savings are safe in other accounts.

Rationalists make up about 12% of the Population

Choosing the Right Bank Account

Not all banks are created equal, and not all account options are the same. You may get higher interest, but be paying higher fees.  You need to chose a bank account that is right for you and your needs.

Consider the following when choosing a Bank:

Can you qualify for special accounts?

There are banks and account options specifically geared towards Senior Citizens, Students, or Military Families.  Seniors tend to use their debit card less, write more checks, and make withdrawals less frequently than other checking account holders, and the accounts offered to them reflect this difference. Senior checking accounts tend to come with free checks. Student Accounts are aimed at those 18-24. Features include unlimited free check writing, no monthly service fee, and a few non-bank ATM withdrawals each month with no charge from the bank.  Military families not only have options for accounts, but also specific banks. Military Banks tend to be more lenient on fees and options.

How Many Accounts do you need?

If you keep a savings account at the same bank as your checking account, you can get discounted perks or no annual fee credit cards. Look at the options of bundling your accounts at one location.

What will be your Average Account Balance?

You will pay less monthly fees with higher account balances. All require a Minimum Balance though, being as low as $50. The average balance required for a no-fee no interest bearing checking account is around $150.00. To generate interest without fees, you will need to keep a balance higher than $3,000. Interest on accounts these days is so low, it is not really worth paying any extra amount to get a interest bearing account.

Do you need checks?

Checks are being used less and less. But some bills still require a check (Apartments) If you can get away with not writing more than 10 checks a month, then opt out of unlimited check option accounts

How Often will you need an ATM?

If you need cash often, make sure your bank has multiple convenient locations. These tend to be your national brand banks. Smaller banks are now offering X number of free withdrawals, or X dollars back in transaction fees.  ATM fees can be a double whammy (fee from the ATM, fee from your bank from not using their ATM) It is very important that you chose a bank to match your ATM needs.

Think outside Traditional Bank Accounts

If you don't need to physically go to the bank, think about adding a high yield checking account to your financial profile.  High Yield Accounts can offer 10X the interest rate of brick and mortar banks. For list check out: http://www.moneyunder30.com/high-yield-savings-accounts-compared

Credit Unions are great options if you don't need all the bells and whistles of a bank. Credit Unions are not for profit and generally have lower fees than normal banks. The catch is, do you need to meet the membership requirements.  Find a Credit Union near you http://www.asmarterchoice.org/

One final note: Since banks these days have such low rates on traditional saving and checking accounts, try to keep an acceptable balance, but put extra money in higher yield accounts such as Certificate of Deposits. Banks can change the interest rate when they want. CD's have interest rate locked in for a predetermined time. Your bank and online banks (CapitalOne360) have different options for CDs.  www.Nerdwallet.com is an unbiased site that compares Checking, Savings, and Credit Cards from Banks around the US.