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.
Lump Sum
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 [1]. 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 [2] 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 [3]. 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.
Action Plan
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 [4].