How to Handle Irregular Paychecks
I recently discussed with a friend how to handle irregular paychecks. Her husband is a teacher and will be getting a lump sum payment at the beginning of the summer. She was concerned about how to make the money last.
It reminded me of a couple other situations, such as how we handled my 5 month unpaid maternity leave and how to handle irregular paychecks for a small business or freelance work. Here’s how you can approach each of these situations without overspending.
Let’s walk through the example I gave with my friend – getting a payment upfront for a given amount of time.
Put the money away immediately. I directed her to put the money in an ING account. I like ING because you can create separate accounts for different purposes. Create a new “paycheck” account to hold this money.
Calculate a paycheck amount. If the money should last all summer, and he was used to what would normally be 7 bi-weekly paychecks during the summer, divide the lump sum by 7.
Schedule your paychecks. In ING you can set up a set of transfers. Schedule all 7 transfers to your checking account bi-weekly for the whole summer.
Adjust your budget. You may find that the “new paychecks” will be lower than your old ones. Various things could impact this based on the way the employer calculated the time period or because of the differences in tax withholding. Adjust your budget to cover any shortfall.
Relax. You no longer have to worry that in August you’ll have already run through all the money, as your newly scheduled “paychecks” will arrive as scheduled.
Small Business or Irregular Paychecks
When you run your own small business or typically receive irregular paychecks due to freelance or contract work it may be easier to smooth your income into your checking account. Consider yourself your own employee and create a schedule of paychecks.
Create a holding account. Similar to the steps above you’ll want to create a separate account to house all your incoming money.
Calculate a minimum. Determine the least amount of money that you can get by on each pay period. This will be your “minimum paycheck.”
Calculate a target. Determine how many times you predict that you won’t bring in the minimum to pay yourself your paycheck and by how much. Total these amounts and add some additional money just in case. This target number is how large of a buffer you’ll want in your account.
Transfer your paychecks. Each pay period, transfer your “minimum paycheck” to your checking account. Leave any additional money in the account to build the buffer. This will enable you to still get your minimum paycheck at times when your incoming money isn’t enough to meet the minimum paychecks.
Give yourself more money. At some point it’ll be time for a bonus or a raise. Once you reach your target, if you see that your holding account is continually growing, you can either raise the minimum paycheck or give yourself a one-time bonus.
Saving for Unpaid Time
I used a similar approach for handling 5 months without a paycheck.
Calculate the total unpaid time off. Determine the total amount of money that you won’t receive and how long of a time period it will cover.
Set a savings goal. Divide the total amount by how much time you have until the event begins. For example, if you want to save $5,000 in the next 8 months before a baby is born, you’ll want to set aside $625 per month.
Save the money. Put the money in a holding account so you aren’t tempted to spend it on something else.
Calculate and draw paychecks. Once your unpaid time begins, calculate and schedule the paychecks similar to the lump sum method above.
I’m currently working on establishing a paycheck system similar to the one above for our business. It helps a lot with planning, budgeting and the overall stress level of money management. My next step is to calculate a target amount for the months with a shortfall.
Have you dealt with irregular paychecks? How did you handle it?
This article is featured in: Carnival of Personal Finance, #159: The First Zero-Emissions City.
Very nice post!
Thank you, as a family with irregular paychecks, we’ve gone through many permutations as to how to get by on the slimmer paychecks. The most successful is having everything budgeted as if we’re having minimum income all the time and excess stays in savings until we’ve survived a year of irregular bills. I would feel safe then moving excess to a better investment vehicle. So far, there’s been no excess 🙂
Good post. Every 3 months my end of month check takes a hit. I found that prepaying my utilities, etc. w/the 2 checks prior works as I’m not so crazed. I used to take the money out of my E-fund, but I had to always pay myself back. I found it easier just to budget for the fixed expenses.
Timely post! I’m contemplating a job change to a position that could have one of those irregular pay checks (albeit much larger) so I’m glad you wrote about this. Maybe it’s a sign??? 🙂
thank you so much! i’ve been trying to create a budget but couldn’t quite figure out how to plan around our fluctuating income. this makes total sense.
@ Jay: A year sounds like a good amount of time to let everything sit before moving it to another account. I’ll put that in my notes for our business income.
@ The Diva: Good solution! And it probably feels much better than hitting up the e-fund all the time.
@ Ron: Ah yes, don’t you love it when you start contemplating a change and something tells you to do it?!
@ Jill: Let me know how it goes!
Great article! I’m trying to figure this variation of paychecks out myself. 3 years as a small business owner, and I still haven’t nailed it. Practice makes perfect, I suppose. Thanks for the action plan. I absolutely will be using some steps in the future.
[…]My Dollar Plan wrote an interesting piece on irregular paychecks. As a small business girl, I’m still struggling with this one on a regular basis.[…]
this is great for teachers! you have some amazing ideas!
I’ve recently left my job to become self-employed and it’s difficult to change from having regular paychecks to having a variable payday so this is really helpful.
louise’s last post: Getting my life back
A lot of what you’re describing is what I call self-annuitizing. It’s a great strategy for “smoothing” income streams to make budgeting easier. Structuring your finances in this manner can make budgeting easier since you have a well-defined regular value on the income side of the equation. As an added bonus, it can help you to “cut the fat” out of your budget, if you grow accustomed to smaller “synthetic” paychecks. At that point, you’re double-winning, by spending less and saving more.