Budgeting On A Fluctuating Income

Q. I would like to know if anyone has any advice or knows any good resources for budgeting on a fluctuating income. My husband is self-employed in the construction business, I am a stay-at-home mom with 5 kids. His income can fluctuate from $500-$4000 a month. This amount also includes the money we use for business expenses such as tools, gas, materials etc. We always manage to just barely get by, of course many times we are late on bills, etc. Then when we make more money we are having to play catch-up and it is very hard to get ahead. I would appreciate any advice from your wonderful readers.

The first thing I would do is set up a budget so that I knew exactly what my monthly bills are. Then I would set up a series of payment envelopes, marked with the names of each of the bills (electric, insurance, etc.). On the months you have extra, put more than one month’s payment inside the envelopes. Do not spend the extra that you have! Pay the month’s bills from the envelopes, but do not touch what is left over; it is "saved" for the next month. Add to it as you are able, but keep it in reserve until it is due. If you are disciplined enough, you can keep from spending what seems to be a windfall one month, and reserve it for the times when you have less. It’s sort-of like "income averaging". – W.H.

The reader asks how to budget on a fluctuating budget. I have read alot on budgeting and have worked this budget for 3 years.

First, split your bills into monthly and irregular(those that need paid every few months, six months or yearly). Determine the amount you need to pay your monthly bills. Then divide each irregular bill by 12 (or 10 might be better). Add those amounts up and the sum is what you need to save each month towards those bills. Add the amounts for montly bills and irregular bills together. This is your monthly income. Any money made each month over that amount goes into an overflow column. If you have a month where the actual income falls below this monthly income amount, withdraw the amount needed from the overflow.

Example:
Monthly bills
Rent $670
Groceries $150
Utilities $200
total: $1020
Irregular bills
car insurance $240/six months $40
vet $120/yearly $10
school fees $240/yearly $20
$840 $70
Add: $1020
$70
$1090 monthly income
Hope this is helpful – Mary Ann

The best way to handle a budget in this scenario is to average everything out and spend accordingly. This will take some time to do if you haven’t already kept a written record of ALL your expenses, but it’s worth it.

The first thing to do is add up all of your bills – even the ones paid yearly. This includes weekly living expenses also, like groceries – also include a miscellaneous category of anything and everything that you spend money on not mentioned elsewhere. It is also wise to add in 10% or 15% extra for emergencies, price increases, etc. Add them all up for a 12-month period (weekly X 52, monthly X 12, etc.) and then divide them all by 12. This is how much money you need each month to make ends meet.

Next, do the same with your income. Add it all up for a year and divide by 12. Only include the income from hours worked – don’t include any bonuses, other incentives, etc., unless they are as "guaranteed" as the regular income is. This shows how much money you have to spend for your expenses, so hopefully it is larger than the amount in the first paragraph. If not, you may need to make some adjustments such as eat out less, bring lunch to work every day, watch what you might waste or throw away, etc.

If money is tight, then the idea is to hold on to that money as long as possible and do not spend what you do not need to spend. Pinch those pennies until they scream! All it takes is a plan and the discipline to live by that plan – working on the attitude also helps. I look at my spending plan as a game instead of a deprivation (i.e., let’s see how low I can keep my electric bill this month, or let’s see if I can beat last month’s record deposit amount into savings). You can do it! – Tracy

Make a master schedule for bills that you have regularly such as electric and rent. Next include bills that you get throughout the year such as car insurance. Make a category for food, clothing and these type of bills. Include an entertainment category and a repair (emergency) category . Put these all down one side . Across the top put the month names such as January. You need to break down what you need to pay each month regardless of income for all your bills. Some months you will have higher electric bills and others you will have car insurance premiums due. You need to put money into a special account, envelope or drawer to cover these ‘extra’ bills when your income drops. – CSinbad

The basic idea is to add up (maybe using last year’s records) total income for the year, and divide by 12. In months with more income, reserve what’s left to help cover months with less. Eventually one can set aside a bit of savings which will help to cover occasional shortfalls. Spending should be constant, not variable with income. Sometimes expenditures can be juggled to fit one’s payment schedule (call the business/creditor in question and see if the due date can be changed. Utility bills can’t be, but many others can, including credit cards.) An excellent website devoted to budgeting and money management is cheapskatemonthly.com. Books by Mary Hunt are also extremely useful. – Marianne

First, average your yearly income. That means if your yearly income is $23,000, you only have $1,983 you should spend in a given month. 23000 divided by 12. This is not an easy way to live, but, if you can stick to it life gets much simpler in 6 to 12 months. Anything over $1,983 goes into savings whether it is 50 cents or $2,000. The first few months may be somewhat lean but once you get adjusted to living on just the monthly average of your annual income it makes life incredibly easier. You will have to deal with fixed expenses and there will be lean months especially in the beginning. However, this method does prevent you having to play catch up. Living on the average monthly income can be easily sabotaged by either spouse or older children. You may need to sit down, hammer out a budget and then have everyone who has input into how money is spent sign a contract agreeing to support the new way of living/spending money. Having lived on a fluctuating income at one time, my heart goes out to you, but we are living proof that it can be done without going further into debt and keeping your credit rating reasonably good. – Mary

When my parents decided to go country, as in live in the country, money was tight. But, friendly neighbors helped them when it came to planting a garden. We were lucky and had a bumper crop of corn, green beans, potatoes, broccoli, tomatoes. etc. We learned how to freeze and can. My mother learned how to make jam and jelly. Not only was it less expensive, but the home-grown food was delicious. Imagine, one package of green bean seeds costing about $1.25 grown properly made 1-2 rows of plants that yielded a lot of frozen green bean packages. We ended up having to purchase 2 freezers. By the way, upright freezers are always easier and better than chest freezers. forgot to mention that making a garden around your house doesn’t necessarily mean a plot with rows. Also, vegetable gardens are now laid out as landscaping plants. Good luck. Diana

Breaking Free From Debt

by Donna L. Watkins

Debt-free living is such a key area of our lives that needs to be changed in America. The focus needs to be taken off of THINGS and put on PEOPLE….the time we spend shopping for stuff to fill our closets and cabinets could be, SHOULD BE, spent on building relationships and helping others.

We need a Global Focus to understand that we don’t have to have a Pity Party for ourselves to give up the STUFF. You don’t have to look very far to realize how blessed we are. There are people dying on streets that don’t have any food to eat. There are people eating out of trash cans daily and sleeping on concrete. It’s time for us to be grateful for what we have and to share with others who do not have. God told us to do so.

Here’s a few of our tips for debt-free living. You have to find and make your own. Borrow some books from the library on debt-free living and on simplicity. You don’t have to buy them…..just borrow them. People generally read a book only once and then stick it on the shelf as another possession. Use the library system or check with friends and begin to trade books.

We have been living debt-free now for many years…and it’s brought tremendous blessings of peace and contentment to our lives. To get out of debt, we had to change bad habits of impulse buying. I believe that’s how most people get in debt and stay there forever.

We made a commitment to God and ourselves that we would do three things:

#1) Anytime we intended to purchase something, we would grab our note pad (instead of our credit card) and write down what we wanted to purchase and the price. We would have to discuss it with each other. If we still thought we wanted to buy it, we would wait 24 hours to make the final decision to purchase……that eliminated 90% of our purchases.

#2) When something was a necessity and over $20, we would get three prices on it to be sure we got the best deal for our money. Use the telephone! Don’t waste gas money on comparing prices. It costs approximately 64 cents a mile to run a car in America.

#3) We set up a grocery budget that was reasonable, but not excessive, and we lived off of it. No exceptions! That budget included the "eating out,"which, by the way, we just decided to give up. There’s very little nutrition in eating out, so we figured we’d be gaining greatly with that decision. We"ate out" by serving meals in different places and calling it ‘eating out’…..like on a tablecloth in a bedroom, or eating at the coffee table in the living room, or picnicking outside the back door. Get creative and make getting out of debt a fun project, not a drudgery!

We had a variable income and it appeared to be an impossible task to set up a budget (although I know there are ways to do it), so we decided to set up boundaries instead. Those mile-high boundaries allowed us to have plenty of money each month to pay off the debts we had. After many years of doing this, it just became a "new habit" and we now consider it a lifestyle. It has simplified what I have to dust and clean and maintain…..’cause anything you own costs you to maintain it….and what you own, owns you in some form or fashion.

It’s amazing how much time we have since we rarely go shopping. We purchase our food supplies in bulk once a month and shop for produce twice a month. When you’ve earned the contentment that comes with the discipline of getting out of debt, and you’ve changed your mindset to wanting time and peace instead of wanting things, life becomes a whole new adventure!

We were warned in the Bible about the pressures of debt in Proverbs 22:7,"The rich rules over the poor, and the borrower becomes the lender’s slave."Carrying a load of debt around is definitely a form of slavery/bondage.

Have fun! Live simply! Life is not in who owns the most stuff!

Read more of Donna’s articles on various spiritual topics here .

Love Is Blind But Collectors Aren’t!

The Dollar Stretcher by Gary Foreman

Dear Dollar Stretcher,
Q. I am getting married next year and have a question concerning our individual credit histories. I have good credit and my Fiance does not. I have worked hard to maintain a good credit rating, paying more than the minimum amount due each month. My Fiance however is not good at paying his bills and unfortunately his credit is suffering because of it. I basically have to remind him what’s due, how much, etc. If we get married will whatever he has owed previously (before me) affect my credit or not? I don’t want responsibility for something I had no involvement in. I understand that whatever we do together after we are married is "ours" but what about before? Can you please tell me what is right? Amber

Amber’s right that just by getting married you do not assume the credit history of your spouse. His bad record will not automatically contaminate your good one. Your credit rating is only affected by what you do. Anything that you do yourself or jointly with someone else will be reflected on your record.

But Amber is also correct that events after the marriage will effect both of their credit files. And as time goes by their credit histories will begin to look similar.

Much as we’d like to, you can’t marry just part of someone. We marry all of them. That includes their good and bad points. Also their assets and liabilities.

Unless Amber keeps all of her financial affairs completely separate it will be almost impossible to avoid the influence of his debts. For instance, he may have agreed to pay half of the rent. But he could end up in a position where he’s legally required to pay back a debt before he honors his commitment to Amber.

Before the wedding I’d recommend putting together a joint budget. Just filling out a budget form together should be a real learning experience. Take plenty of time to discuss how each of you relate to money. Come to an agreement as to what’s acceptable money behavior. Any couple planning marriage should do the same thing.

Remember that it’s very difficult to avoid getting tangled up in your spouse’s problems. Whether your mate snores or has a financial troubles, it’s pretty tough to ignore. And it will affect your relationship and home life.

Amber’s fiance isn’t just bringing debts with him to the alter. He’s also bringing promises to make future payments to different creditors. It’s just like Amber is also saying "I do" to his payment schedule. The marriage doesn’t release him from any commitments to repay debt.

The creditors won’t attend Amber’s wedding reception but they will expect to be repaid. So if he falls behind they’ll go after any money that legally belongs to Amber’s fiance. That includes anything that’s owned jointly with her.

There are several types of joint ownership. Space doesn’t allow for a detailed discussion. But be careful. Many joint accounts (for instance a joint checking account) allow for either person to access all of the money. That means that all of the money is also available to creditors.

Amber’s husband-to-be may not want to tap into a joint account. But if he falls behind his creditors could get a judgement and force him to. Courts generally don’t care who contributed to the joint account. If he can legally access the money it’s also fair game for creditors.

Keeping Amber’s finances separate isn’t going to be easy. Want to buy a home? You’ll need to plan on doing it in your name alone. Joint ownership would make the house a target for creditors. Even if Amber supplied every single dollar that went into the house.

This isn’t going to be popular advice, but I’d suggest that Amber postpone the marriage until her fiance has better control of his debts. If the relationship is really important to him, he’ll gladly make the sacrifice. If he’s reluctant you need to know before the wedding.

Anyone who’s been married for awhile will tell you that you won’t change your spouse’s habits after the wedding. Don’t expect him to adjust his ways later. If anything, tendencies become more ingrained.

I don’t mean to dump on somebody that Amber holds dear, but it’s irresponsible to neglect to pay bills on time. Grown-ups don’t do that type of thing. It could be symptomatic of an immature outlook on life.

Starting a marriage with this type of handicap is a real challenge. Remember that today’s "reminder" will become tomorrow’s "nagging". My guess is that if he ever starts getting calls from collection agencies he’s not going to be very receptive to Amber’s "reminders".

Hopefully Amber and her fiance will be able to set a solid foundation for a happy life together.
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Bill Collectors

Lessons from My Journey to Debt Freedom by Greg Moore, CFISL

They Got Laws Against That Sort of Thing

  Whenever I teach my 3-hour Debt Freedom seminar, invariably some participants share stories about friends or family who have had unpleasant interactions with debt collectors… Foul language… Shouting… Threats… Phone calls at odd hours… No one disputes that the debts are owed, but is this kind of personal attack permissible?   Nope. Not under U.S. Federal Law…

“Fair Debt Collection Practices Act”

  In 1977, the Fair Debt Collection Practices Act was passed to protect consumers from unscrupulous collection activity sometimes practiced during the course of collecting on debt. Here are just a few items addressed in the Fair Debt Collection Practices Act of 1977 that you may not be aware of: * Collectors may only contact you between the hours of 8:00 AM and 9:00 PM in YOUR time zone… * Collectors may not call you at home if notified in writing… * Collectors may not call you at work once you’ve instructed them not to do so… * Collectors may not use or threaten to use violence… * Collectors may not use obscene or profane language… * Collectors may not cause your phone to ring repeatedly… * Collectors may not pretend to be somebody they’re not… * Collectors may not tell lies to others about your debt… * Collectors may not ask you for a postdated check… * Collectors may not communicate with you about a debt using a post card…   You can find the complete act at: http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm It’s written in legalese, so, it might be good bedtime reading. Of course, paying off your debts is the best way to eliminate this kind of unpleasantness. Unfortunately, life events sometimes make this difficult to do on your creditor’s timetable. Getting behind on your debts is no fun. Harassment, while you’re doing the best you can, makes it worse.   But… there’s laws against that sort of thing.  Use ’em. .

Layoff Strategy With a 401K

Q. I was wondering what should I do with my 401K plan if I were to get laid off? I couldn’t contribute as much as I could if I were employed. I also understand when you do get another job it costs you to roll it over. I have 13K in my 401K already. What would be a smart thing to do with it in the time frame of getting a new job? Just wanting to know in case I do get laid off. – Elaine

There should be no charge for rolling over a 401K Plan. We rolled over a retirement plan, but you must specify that you are rolling over the money. If someone has told you they charge for this, contact another company that handles rollovers. We use Charles Schwab.

In regards to a 401K plan, you have several options for your money in the interim of finding a new job. First, when I quit my job, my employer allowed me to "defer" doing anything with the money b/c I had enough in the account to leave it alone. This may be one option for you since you have 13K; my employer deferred at 5K. Your second option would be to take the 401K money and put it into a Qualified Traditional IRA plan. It is important that the money is designated as Qualified funds if you ever want to move it into another 401K plan. Your third option is to put it into a Regular Traditional IRA; however, if you do this, you will not be able to move the money back into a 401K. It’s very important that whatever you do, you let the company do it for you.

If your company issues you a check for the 401K funds, they are required by law to take out 20% for taxes. You can make up the 20% with you own money, which you’ll get back at tax time, BUT you have to do it BEFORE you put the funds into an IRA. You will need to check with your bank about charges. Some banks do charge an annual IRA plan fee, but I have not heard of one charging a closing fee — unless you prematurely take money out of a CD, then you have the bank penalty fees.- Rebekah

Do not cash it in — I repeat — don’t take the pay-out option!!! You have other choices – leave it where it is in your then former employer’s plan, roll it over to an IRA, or specifically request a "conduit IRA" at the time of the IRA roll-over which gives you the option of moving that particular money to a new 401K plan in the future if you want to. I also recommend that you avoid taking out any loans on that money because you will be expected to pay it all back immediately at the time your employment ends which is when you can least afford it; the other alternative would be to take a huge tax hit which, of course, you don’t want. Hope a lay-off never happens to you (it’s tough), but hope this helps if it ever does! – Tracy

When you get laid off or quit your job just leave your 401(k) alone. The company handling the 401k will send you a quarterly report and you need not do anything with the 401k til you get settled and can think about what you want to do. I have quit two jobs in the last 7 years and just left both my 401k’s alone and they are still there! Soon I will be rolling both of them over into a Janus IRA but until then they are just fine where they are. Many people think they have to "do" something with them and you don’t. – MH & SH

Finding the Best Auto Financing

The Dollar Stretcher
by Gary Foreman

Dear Dollar Stretcher
We normally buy used cars and trucks but we decided to buy a new truck from a dealer. What advice would you give us to deal with the new car dealers. Sheryl 

Sheryl’s question really has two parts. Naturally, she’ll want to get the best price from the dealer. We looked at that last time. But, unless she’s paying cash for the car, finding the best auto loan could reduce the cost of the car by up to 5%.
So how can Sheryl find the best financing? Let’s examine some strategies and pitfalls.

Before she even shops for a loan it’s wise to get a copy of her credit report. If there are errors on the report, cleaning them up before applying for a loan will save money. Remember, the interest rate you pay will be directly related to your credit history.

Once Sheryl has reviewed her credit report, it’s time to shop for a loan. The local credit union or bank is likely to have a better financing offer than the dealership. So she’ll start looking for a loan before she ever sets foot in a dealership.

There’s another reason to shop for a loan before shopping for a car. The signed deal to buy the car isn’t really complete. It probably includes a "subject to financing" clause. That means that you haven’t really bought the car until you arrange financing. 

So you could be sitting in the dealership dreaming of that new cruiser. Then the dealer discovers that you don’t qualify for the low rate that they’ve quoted to you. Will you be willing to walk away from your dream car for ‘a few dollars more each month’? The dealer counts on the answer being ‘no’. 

Avoid the problem by starting the loan shopping at your bank. Tell them how much you’d like to spend on a car. They’ll check your credit. After that they’ll propose an interest rate and what your payments would be. Have the interest quoted to you as an Annual Percentage Rate (APR) so that you can compare offers. 
Write out a list of questions to ask the loan officer. This isn’t a simple document. Some seemingly minor clauses can be expensive later. For instance, find out what happens if you want to pay the loan off early.

Once your questions are answered it’s time to negotiate. Most newspapers list the rates charged by different banks and credit unions for auto loans. Ask your bank if they’ll match the lowest rate on the list.

And don’t concentrate on getting the cheapest monthly payment. Sure, you need to know that the payment is affordable. But a lower payment could hide the fact that you’re actually paying more for the loan. 

Your goal should be to get the lowest APR. On a 48 month, $25,000 loan a 2% difference in APR will cost you an extra $24 each month. That’s a difference of $1,142 over four years. And, depending on your credit history, rates can vary by 3 or even 4%. That’s a lot of money to give away. 

Make sure that you know how many payments you’ll make. Remember that a loan can cost more even if the monthly payments are the same. All they need to do is to make the loan last longer.

Avoid balloon payments. They’re a disaster waiting to happen. Sure they’ll lower your payments now. But if you can’t afford a higher payment now, where will you get the money to make the bigger balloon payment later? 

Credit insurance is not required by federal law. And it’s very expensive life insurance. Negotiate with the lender. Some may require it. But, if your credit history is good you can always look for a lender that’s more flexible. 

Don’t forget to check out any credit unions that are available to you. Often their rates are cheaper than banks.

There are two other popular methods of financing cars to consider. Some homeowners choose to borrow against the equity in their house and use that money to buy a car. And, generally, a home equity loan carries a lower APR than a car loan. But, it’s important to repay the loan in a timely manner. Remember, you can’t borrow $25,000 against your home every four years without paying it back.

Another option is to tap into your 401k retirement plan. Many 401k plans will allow you to borrow to buy a car. This can be a good idea, but you do need to be careful. First, some plans require you to completely repay any loans if you leave your job or are laid off. Second, you might find that you’re not allowed to contribute while you have a loan outstanding. That could significantly effect the size of your retirement nest egg. Take the time to ask questions before you borrow the money. Making a mistake with your retirement plan could be very expensive. Read every paper before you sign it. And, if you don’t understand it, ask for an explanation. If you don’t understand the explanation, ask for a copy of the document that you can take to a professional or trusted friend for help.

Make sure that the finance papers look the same after they come back from the credit manager. It’s not uncommon for them to change the interest rate. And sometimes they conveniently forget to mention that fact to the buyer. 

Once you’ve found good financing it’s time to find a car you like and negotiate a price with the dealer. Then you can see what financing they have available. That puts the dealer in the position of having to match the well-shopped financing that you’ve already arranged. 

Generally, dealers don’t actually loan you the money to buy }our car. They sell the loan for a bank or finance company. And they’re paid based on how high the interest rate is. The more }ou pay, the more they make. Perhaps they’ll have something better. If so, great. If not you won’t find yourself stuck with overpriced dealer financing.

Sheryl has two opportunities to save on her new truck. We hope that she takes advantage of both of them. 
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