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

Fingerhut = Bad Financial Decisions

 I recently saw an advertisement on TV for Fingerhut, and how you now can get ALL the gifts you want at a low price.  This intrigued me considering I love a good deal. However, what I found was another Rent to Own Money Sucking Deal. All of these Payment Based Shopping Sites are terrible financial decisions.  They lure you in with promises of savings and deals, but in the end you are stuck in a wormhole of debt.

Why Fingerhut is a bad idea:

1. Items listed on Fingerhut are brand name goods,  From Household items to high End Electronics. However, the pricing is highly inflated. I took a sample of 20 items I considered key Christmas gifts and compared FingerHut pricing to Amazon.  On average, Fingerhut items are 14% more expensive than Amazon. (Shipping and Handling not accounted for)

2. Fingerhut is just another Credit Agency that happens to sell goods. Their "low payment" options are backed by high interest rates around 25%.  

For Example: A Keurig Coffee Brewer is listed at $140.00 with 15 payments.  Using Finderhut payment plan this coffee maker will minimally cost you $157.34.  (Whereas buying at Target it is $109.00). 

3. Shipping Costs may be rolled into Final Finance Price, which means you will be paying Finance Charges on shipping. Fingerhut has a tiny link at the bottom of the page that shows the true cost of ownership based on product prices.  After a 5 min search I was able to find that the $139.99 Keurig would eventually cost between $157 - $300.00!!! (see Table below)

4. Fingerhut likes to pride itself that it can help build Credit with the Fresh Start Program. First off, if you have a terrible credit score, its most likely because you were not able to repay loans..so why are you continuing to borrow money??  You should never  try to get a better credit score by increasing your debt. Payoff what current debt you have, and continue to pay all other bills (cell, electric, etc ) on time.

Example of how Buying a Keurig via Fingerhut can hurt financially.

Debt Payment Schedule: Debt Snowball

Do you have multiple debts you want to pay-off, and pay-off quickly? There is no better way to get rid of debt than by using the debt snowball method. I originally heard of the debt snowball from the Dave Ramsey show and have found it quite useful in getting debt under control.

The jist of the snowball is quite simple.

1. Write out the list of current debts and payments.
2. Focus on one of the accounts ( usually the lowest balance or highest rate) and add additional amounts to pay off that loan

3. Continue to pay the minimum payment on the others debt

4. As soon as the first loan is at 0, roll what you were paying on that debt into the next loan

5. Continue to roll your payments as each loan is paid-off

It's important to have a Debt Payment Schedule to track payments and timelines. A comprehensive  schedule is available on this site for downloading.  A training video on using the Debt Payment Schedule is available on the Simple Saving Habits YouTube channel.

Simple Savings Habits YouTube Channel

Quick Summary on how to use the Debt Payment Schedule

1. List out all of your current debts

2. Determine how much each month you can contribute as an additional Payment, aka Snowball

3. Rank debt by importance of being paid off

4. 
   Optional: Breakout the Snowball amount among the debts to compare between payment methods

5. Using the Snowball Schedule Tab, toggle between the two options to see which is best for you.
1. You can continue to play around with the rank and new payment to create the best option for your payment plan

6. Once you found the best approach for debt repayment - Print off the Snowball Schedule  to keep you on track
1. If you are able to make additional payments during the repayment time period, note those extra  payments in the schedule. This will help decrease interest paid on loans, and decrease time it takes to pay off the loan(s).
1. 

Using an Amortization Table

An amortization schedule is a table detailing each periodic payment of an interest bearing loan. It is useful for knowing the true cost of a Loan, the breakout of a monthly payment for principle and interest, and changes in the loan due to additional payments against the principle.

Having an amortization schedule set up for a large loan like a mortgage can help a person make a plan to pay off the loan sooner and thus saving hundreds, or even thousands of dollars.

The downloadable amortization loan schedule for Simple Saving Habits is easy to use. You can use this schedule to analyze a current or future loan. For a current loan, you will need to know the Total Loan value as of today, your minimum monthly payment, and the Interest rate on the Loan. (APR)

A training video is also available on the Simple Saving Habits youtube channel that shows how to use the Amortization Schedule.

https://www.youtube.com/channel/simplesavinghabits

1. Create the schedule by filling out the required Loan fields (Today's Date, Current Loan, APR, and Monthly Payment)
1. If you do not have a current loan, use the box on the right side to estimate a monthly payment based on an expected APR and loan.

2. Loan Summary gives an overall snapshot of the Loan.  The Total Loan represents the Total Cost of the Loan. (borrowed amount + accrued interest). When you pay more than the minimum payment, that money will go against the principle of the loan and reduce the total interest and time  it takes to pay-off the loan.

3. The Loan Schedule shows every payment made until the Loan reaches 0. Important fields to note in the schedule are:
1. Principle and Interest - Each payment is broken down into a value that goes against the principle of the loan, and for interest incurred.  The Principle will always start off lower with the first payment, and increase over time.

1. Cumulative Payments - The shows how much you have paid for the loan at any given period of time.

2. Total Loan Cost - This shows how much the loan has cost at any period in time. It is calculated as total Payments + Remaining Balance of Loan

Ways to Save Money and Pay-off Loans ahead of Schedule

1. Increase the Monthly Payment - Determine an amount that can be paid as extra every month with the minimum payment. Adding $100 dollars each month, can save $33,000 worth of interest, and pay off a mortgage 5 years earlier.

2. Add occasional Payments that vary throughout the life of the loan - If you are unable to commit to a monthly payment increase, use the Extra Payment Column on the Schedule Table to make payments against the loan.  These could represent payments made due to Tax Return refunds once a year.

How Much Can I Afford for a Car

Before I get into how to calculate how much you can afford for a Car, let me first ask DO YOU REALLY NEED A NEW CAR?

Car Payments are a huge burden when you are already strapped with Credit Card, Student Loans, and other Debts. Are you buying a car because you NEED to, or because you WANT to???

Buying a Car will most likely be your second largest expenditure in your life.  You owe it to yourself and your budget to take 30 minutes and do your due diligence.  The ideal way to buy a car is to pay cash for the whole shebang,  when you finance anything you are paying additional money to a lender to borrow money.  Since 80% of Americans don't buy cars outright, here is the financially savvy way of determining what you can afford based on your budget and preferences.

In the example below I will mimic moving from a 2000 Ford Explorer to a Used Domestic SUV crossover 2-3 years old. 

Buying a New (Used) Car

1. Know the Monthly Payment you can Afford
1. Not sure how to calculate a starting monthly payment? check out - HOW TO BUDGET FOR CAR PAYMENT
2. Based on my monthly budget, my starting monthly payment is around $300

2. Factor in Additional Monthly Costs
1. Car Insurance - If you are upgrading your ride, you bet your bottom dollar that your car insurance will go up. Get a quote from your current insurance provider on how much your insurance will change.
1. I got a quote from my current car insurer that my monthly Insurance would increase $30.00 a month.
2. Gas - Changing cars can benefit your hurt your car budget. Going to better fuel economy car will allow you to budget more money for a monthly payment, but going down in fuel economy, such as moving from a 2 door coupe to a Mini Van will cost you more each month. 
2. Look up your average MPG for your current car and expected new car.  You can modify the calculation by the PERSONALIZE feature to change Yearly Mileage and Gas Prices
1. http://www.fueleconomy.gov/feg/Find.do?action=sbsSelect
2. Based on my driving habits, and a projected new 2012 Rogue I want. I estimated I will save 58.33 a month in fuel cost
3.  Max Monthly Payment 328.33

1. Determine Present Value of Monthly Payments
1. Present Value of your determined Monthly Payments is based on two  key  variables:  Length of Terms and Rate
1. 3 years financing for a car is preferred, 4 is acceptable,  5 is irresponsible. 5 years is the difference between your child being born and the child entering kindergarten...That is a loooong time.
2. You will need to know how you plan on paying for a car, before you even step foot in the dealership.  Your Loan Rate will be based on the amount borrowed and Credit Score. If is very important to KNOW your expected Rate. Many sites will claim super low rates, but only 5% of the population actually qualify for that rate. Get a quote from a trusted lender, like your current bank. You can do this Online and in about 5 min.
3. Using a Present Value calculation plug in numbers you have determined. For this example I will use $328.33 monthly payment. 4 year loan(48 monthly payments)  and 3.25% APR (which is .2708 per month)
1. From this calculation I get $14,759.84
4. http://www.investopedia.com/calculator/annuitypv.aspx

1. Factor In Up Front Costs and Credits
1. Add Your Down Payment
1. The Larger the Down payment the more car you can afford.
2. For my example I plan to put a down payment of $2,500
2. Add in Expected Trade In or Selling Value of your Current Car if you own
1. www.Kbb.com
2. If you currently already have a loan on the car you want to trade-in/Sell. You will need to look up the blue book value of your current car, then subtract out what's left on the loan.
3. Based on the milage and condition. My 2000 Ford Explorer is estimated to be worth  $2,000
3. TT&L Tax Title and License can cost a couple extra thousands of dollars, and differs state to state. Using the CarMax TT&L calculator determine the average TT&L for your range
1. http://www.carmax.com/enUS/tax-title-tags-fees-calculator/default.html

 Summary: 

$       300.00	Budgeted Amount
$          28.33	Gas and Insurance
$        328.33	Max Monthly Payment
$  14,759.84	Present Value for payments
$    2,500.00	down payment
$    2,000.00	trade in
$  (1,400.00)	Estimated Tax Title Licenses
$ 17,859.84	TOTAL ESTIMATE CAR I CAN AFFORD

Word to the Wise

• DO NOT get roped into Longer Financing Terms for a cheaper monthly payment

• Do NOT manipulate the numbers above to be more in your favor. Which means do not underestimate your gas cost for the future, or skimp on Car Insurance just to get a better monthly payment

• DO NOT take more money from Emergency Fund to have a higher down payment. Having the Audi A4 over the Toyota Camry is no reason to endanger real emergencies.

• DO NOT Buy a Car until you run these numbers with Actual values like Insurance Change and TT&L.

Using Mint.com

The hardest part of budgeting is having one location that stores all your financial information. In the past budgeters have had to pull bank statements, credit card statements, saving, and everything else in between in order to figure out the full picture. Enter MINT. The easiest, most efficient way to manage your money online. Best part...TOTALLY FREE. How are you not already using this budget miracle??

 If you are technology-challenged, the idea of using an online tool for money management can seem severely overwhelming. Just searching for a How To Video for Mint returned over 29,000 hits on YouTube.   Below I've outlined the best teaching Videos with My Tips and Notes.

I could never find a single Training Video that covers beginning to end How to Set Up and Use Mint.  I've broken out the best training videos on the web in a logical order, (Note some videos may seem to overlap in content. )

For additional resources, or questions on a specific task in Mint, check out  http://www.howtousemint.com/  and the mint.com YouTube channel

Watch the Demo first to get a quick overview before getting your hands on experience: http://www.howtousemint.com/learn-to-use-mint-com-via-the-online-demo-site/

Steps by Step Tutorials for Mint.com

1. Setup Mint.com Account and Link Accounts

http://www.grovo.com/set-up-an-account-with-mint/sign-up-for-mint

TIP:

• Add all Savings, Checking, Credit Card and Loan accounts. Any account that has money going in, or being taken out needs to be accounted for.  Other "Assets" such as your cars or house are not as important.

2. Review & Edit Transactions

https://www.youtube.com/watch?v=83uY_b2Ueq0

TIPS:

• Mint will import the last couple months of bank transactions. Take the time, and review each line and category. You will most likely want to change a couple of transaction categories to tailor to your Budget needs
• Keep Categories to a manageable count.  Having more than 20 categories to budget against will become more difficult to manage.

Group similar transactions into a single Category. Example: Starbucks will be imported as Coffee Shops. Unless you really want to track exactly what you spend on coffee, think about just using Food & Dining or Restaurants.

• Review your Transactions at least once a Week. This will make End of Month reviews so much easier.

3. Setting up a Budget

https://www.youtube.com/watch?v=TnfXX27Tfow&feature=youtu.be

TIPS: 

• Setting up a Budget will be the hardest task when using Mint. You may not even know what you think you should be spending on Gas. If you are struggling with where to start, checkout my other post on CREATE A BUDGET

• You don't have to create a budget for every single category of transactions. You may already know your big budget breakers such as restaurants, gas, or clothes shopping. Set up a Budget for those categories in which you'd like to monitor.

• Then set up an alert. Alerts are automatic emails sent to you when you are getting close, or over your budget.

4. Trends

https://www.youtube.com/watch?v=p3ceNFLLR3E

TIPS: 

• As great as Mint.com is, it has some enhancements it should do to the trends section. Trends are great to see how your spending is trending. I like to analyze this page at the end of the month to see a quick snapshot of that month's spending.

• It is difficult to see month-to-month budget vs actual spending. To do that, take a look at my other post on CREATE A BUDGET to see how you can compare your Expected Spending to Actual Spending.

Just going through the above steps in Mint will greatly benefit you monthly budget. More advanced Features of Mint include setting Goals such as Paying off a Mortgage or saving for a Big Trip.  The Investment feature tracks brokerage accounts and shows you how your investments fare against key Indexes.

1. Goals

https://www.youtube.com/watch?v=OtBa9gKcySI

2. Investments

https://www.youtube.com/watch?v=_RlBzDPulk4