What would you do if your your consistent, reliable paychecks suddenly became variable? Would it affect how you budget? Would it make you want to be more diligent about budgeting or to just throw in the towel? How would your spending and saving be different if you didn’t know what your income would look like from paycheck to paycheck?
I know some of you have already been up against these questions. For many, having a variable income is an excuse not to budget at all. Others manage to thrive on a budget even though no two months look the same with regards to income.
We just joined the variable income club.
A few weeks ago, we found out that our income would be changing. We’ve spent the last couple of weeks wondering how it would actually play out. Here’s the history:
Our Old Income
My husband works at a small law firm and makes commission on the work he does (or at least the work he gets paid for). Lawyer work and pay is naturally unsteady. Some matters take a lot of time and work, but don’t get paid for until long after the work was done. Sometimes he sees a few large fees come in all at once. There always seems to be some time-consuming work that never gets paid for at all. Because each month might have a substantially different amount of income, his commission earned each month can vary quite a bit.
In order to even out the natural highs and lows, the firm has paid him on a draw system. He gets a paycheck of the same size each month, his draw amount. His actual earned commissions are tracked and used to set a draw amount. If, over a six-month period, his average earned commission goes up, the draw amount (and thus his regular paycheck) go up too. If the average goes down, the draw is adjusted downward so the firm doesn’t overpay him. Each month he gets a statement of what he has earned versus what has actually been paid on his draw, so he can see whether he is getting ahead or falling behind.
Now instead of a draw, he will be paid a strict commission, based solely on the actual income of the previous pay period. Twice a month the firm adds up the money received since his last check and pays him his percentage of the total received income.
Our paychecks will vary, probably a lot, depending on what kind of work he’s doing each month and when it is actually paid.
Our monthly debt repayment progress reports (budget reports) will be a little more interesting now! Instead of just seeing the changes in how we spend our money and how much we pay in debt, you will see fluctuations in income, too!
Looking at the Bright Side
Neither of us have ever worked in sales, where pay is often based on commission. We are totally new to this type of financial challenge. An announcement like this can really increase stress and financial panic. We are trying to find some great things about our new situation.
My husband has thought about going out on his own at some point. He is already responsible for bringing in his own work and handling everything for his clients from beginning to end. Dealing with the ebbs and flows of variable income will help us get a better idea of what a solo practice would look like, while still having the luxury of having a paid-for office space, a receptionist, and the other perks of being a part of a firm.
The idea of a commission-based income can be motivating. You are motivated to use your time wisely and take work that pays and isn’t a major time suck. You’re also motivated to get your bills out promptly and make sure that you get paid for your work. You have a greater potential to make more money than with a standard salary.
How Variable Income Affects Our Budget
When we found out the change to variable income was really happening, we talked about how our budget would be affected. My first thought was that we should be extra careful not to put too much toward our debt in case we have a bad month. I figured that we should probably keep a reserve of money for months when commissions were low.
Then it dawned on me.
That’s what we already do! Living on last month’s income is the perfect solution to budgeting variable income. I knew that and have even talked about it on this blog, but in my flurry of worrying and fretting, I had forgotten. We are already on track for success with variable income! We won’t need to make any budgeting changes (at least none that I foresee right now).
Living on Last Month’s Income
In a nutshell, the money we earn in June is not touched until July. At the beginning on July, we know exactly how much money we have to work with. Meanwhile, we save July’s income to use in August.
If June is a low commission month, then our July debt repayment will be low (or non-existent). We will also cut other budget areas as needed in a month after a low income. For example, with a stocked pantry, freezer and food storage, we could go without grocery shopping for a month pretty easily.
If June is a high commission month, then we will have more flexibility with how much we are able to throw at our student loans in July.
A flexible income will definitely keep things exciting around here. While it might be more stressful as well, it will hopefully give us more opportunities to make strides to being debt-free. We just got the first strict-commission paycheck, based on what he brought in between June 1 and June 15. He had a couple of larger matters that were paid during that time, so it’s a nice check. The check for the second half of the month will likely be smaller. It will be interesting to see how this change affects our debt-tackling abilities!
How about you?
- Have you ever dealt with budgeting variable income?
- What tips do you have for handling commission-based pay?
You Might Also Enjoy: