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Erratic income - how to budget?(19 Posts)
We can't be the only family in this situation, but it seems that organising our finances is beyond me.
My main problem is that all budget advice begins with "make a note of your income". I'm a SAHM. DH is self-employed and his income varies wildly from month to month, and bears no relation to the amount of money he's billed that month. DH's income represents 100% of our family income.
Ideally, whenever a cheque came in, I'd pay it into the savings account and once it cleared, put, say, 50% into the tax account, 30% into the housekeeping account, and 20% into the savings account. However, when a cheque does come in it's more a question of: "holy crap, which account is the most overdrawn, put the money there" . So each cheque gets used up putting out small fires rather than being part of any coherent strategy.
We have far too much short term debt - credit cards and overdrafts - which we want to pay off. DH's income is perfectly adequate for us, it's an organisation problem rather than a problem of impecuniosity, even though we always seem to be skint.
There are a number of side issues as well, relating to being gormless, coping with stress, responsible spending etc, but I think dealing with the initial budget question is the first step.
Those of you whose income is wildly variable, how do you organise yourselves?
You need to look at your outgoings first, rather than income. List all your direct debits, regular payments, min payments on credit cards etc. Set up one account for all of these to come out of, and make sure you put enough in for these every month. Personally I'd suggest spreading the payments out on different dates rather than all on one date but aim to have enough in by the 1st to cover them all (having them all spread out gives you a bit of breathing room if you can't afford it on the 1st, but if you can then you don't have to think about bills again for another month).
Next work out how much you need to live on eg minimum for food shopping, fuel/travel costs, clubs for the kids. Personally I'd do this as a weekly amount, so when you get a cheque in, once the bills account is topped up work out how many weeks worth of money you have left over and mark this on a calendar.
Anything extra you get in can be used to pay off some of the debts. It would be a good idea to look into consolidating them so that you aren't firefighting, but only if you know you can make the payments each month. Often credit card debt is better in your situation than a loan as you can overpay if you get a larger amount in one month - this only works if you make sure to pay it!
Oh, and the responsible spending etc side of things - take weekly allowance out as cash if necessary and hide bank cards the rest of the time - means you won't go over the weekly allowance for spending!
Hope that's all helpful
Good advice from rock chick though I don't understand why you are putting 50% into the tax account? Do you mean for the annual self assessment?
Rockchick - that's really helpful, thanks. We had a joint account years ago but it wasn't a great success so I'd dismissed it as being suitable for us. But if it didn't have a cheque book or card, and we just used it for household direct debits, I could see it being very useful.
I'd need to pay into DH's business account, too, as he has several business-related direct debits that go out of that account.
Would you use a different account for the housekeeping expenses? I'm a bit stuck on those ones. Actually, I suppose I could use my current account for that. For DH's expenses use a personal account and a business account as appropriate? He needs the use of a card. If he takes the train on a business trip, for example, he pays for the ticket (often short-notice trips so he buys the ticket at the station) and then accommodation, meals etc using a card. Some of those expenses are difficult to budget for and once he has the card he goes and spends on it. Not ridiculously so, but without much reference to whether we can actually afford it . The only thing that ever helps is for me to be ever vigilant which I struggle with. I do it in fits and starts.
I've wondered about consolidating all the short-term debt, but, as you say, we couldn't be certain that we'd have enough each month to meet the payments. And I'd not be sufficiently confident that we wouldn't just run them up again.
Ladykookoo yes, 2 income tax payments a year plus various other HMRC-type payments during the year, so we need to build up a sizeable stash and also have some idea what those bills will be, or else we get a horrible surprise and mad scramble to find the money (or not).
Could DH get a business account credit card which he can use solely for work expenses (like train tickets etc)? He would have to pay it off in full each month but presumably that would also make it easier when doing his tax return for things which can be deducted?
Definitely use a separate account for bills and household expenses - that way you know exactly what you have available to spend without worrying about the bills.
He used to have a business credit card but we got rid of it - not a success for us. I suppose he could use his business account debit card for those things.
HMRC offer a direct debit facility for advance payments. Could you set up a direct debit for something each month towards the tax return so that you are not putting aside 50% of the income? That seems a lot to put aside just for tax? Couldn't the 50% cover the business expenses and as Rockchick said, use a business credit card?
I've looked at the direct debit facility, but whilst it's fine in a good month, in a month when he hardly gets paid anything it's just another debit that we worry will bounce.
He needs the use of a card......Some of those expenses are difficult to budget for and once he has the card he goes and spends on it. Not ridiculously so, but without much reference to whether we can actually afford it . The only thing that ever helps is for me to be ever vigilant which I struggle with.
TBH, rather than focusing on your organisation and accounts structure, you'd be best sorting this (big) problem sooner rather than later.
My DH and I have had all sorts of financial arrangements (anything from both working full-time, to neither of us working, to one self employed, and everything inbetween), and the one constant that mucks up our situation is when things tilt so as there's a single point of failure.
There are weeks where you'r busy, or tired, or distracted, or whatever, and he needs to be your backup. It sounds like you don't have a backup and that if you make a mistake then there's no one to catch it (whatever "it" is, a missed direct debit or whatever).
That is a big problem that needs to be tackled head on. I'm not saying that your DH needs to have an equal stake in things, i.e. maybe he doesn't have time to log into your internet banking or move funds, or pay the bills in a literal sense, but he needs to own some of the accountability for your financial affairs.
I have a self-employed erratic income. I work out my minimum expenditure for each month (though right now i'm doing ok so it's not entirely minimum as it does include some spending money for frivolities, these could be cut if money got tight) and then each month I forecast the money going in based on the work i've got booked to check if it's covered.
In any month that I earn more than I need, I put the excess into the savings/tax account immediately and do not spend it.
In any month that looks short, I transfer the minimum required to make it up back from the savings/tax account to the current account.
I keep a note of tax due on the business spreadsheet so I know that the savings account must not drop below x amount at any point as that's owed to the tax man.
This relies also on me keeping my spending to the amount that is allocated. But as that's almost the same each month it's pretty easy to have a feel for it and know if there's been more than usual and so double-check mid-month.
Just another thought - if your DH is as rubbish with money as he sounds are you sure he's keeping decent business accounts?
If he's not then he may be paying too much tax if he doesn't have a good handle on his costs... my business accounts are always up to date (i put aside an hour every friday afternoon/evening) so it makes my personal finances easier.
I think you need an accountant to help you with this. I would say it's important to keep the business accounts and household accounts entirely separate. If his business has very erratic cashflow he needs a business overdraft facility to smooth out the ups and downs, making sure that the household accounts get a fixed contribution each month. If his business incurs charges, they can be written off against profits. If you have personal debts, they can't.
You mention that his invoices and income are out of step. What are his payment terms? If you are a SAHM could you take on the role of credit controller and get customers to pay their bills more promptly.
Bluebell - you're absolutely right . But I think the time to re-model DH is when I have the moral high ground! At the moment we are floundering around together. I can make some big improvements on my own, but I agree that we will get to a point where DH's active co-operation is essential.
Badguider thanks. Whilst his business bank account is used to personal expenses as well, we are actually pretty good at working out which expenses are tax-deductible. I prepare a huge spreadsheet (at the last minute) after going through mountains of receipts, bank statements etc which we send to his accountant, showing all the expenses, in categorised lists, that we think are tax deductible.
Cogito the accountant is pretty good at advising on which expenses we should set off against his income (ie quite conservative), and the accountant actually prepares the tax return. I don't want to go into more detail online - he'd probably feel as though I've aired enough dirty laundry already - but he is very limited as to what measures he can take to recover debts. The people who already do a (bad) job trying to recover debts for him are actually better placed than me to do it.
He is at the limit of his business overdraft, same with our personal overdrafts and credit cards . And it got like that through the sort of firefighting I described in my initial post, so the business o/d isn't just from business expenses, and the personal ones not just from personal expenses. It's getting out of this whirlpool of debt that I'm struggling with, in addition to settling up systems to work with from now on. And because when we look at the amount he earns each year, he does earn "enough" for us to manage on, it's just the way it straggles that makes it difficult. I'm therefore reluctant to consolidate the debt.
Reading that back, I realise that I've made it sound as though he works in the field of organised crime . He doesn't!
Our household income ranges from £1,000 - £9,000 per month. Not helpful! And, like you, we were very disorganised. It all gets paid into dh's business account and then he was transferring it over to our joint household account as and when needed.
But I have recently sat down with the bank statements, worked out exactly what our fixed cost monthly outgoings are, added on an extra £1,000 for food and day to day expenses and said "this is the amount we have to live on each month". Everything else goes into one high interest online savings account for tax, holidays, large unexpected expenses etc.
We are now completely disciplined about paying our "salary" into our current account on the same day each month.
Leaving aside the business accounts, if you're in a 'whirlpool of debt', you may benefit from talking to CAB, CCCS or National Debtline... the free debt advisory services. There may be ways to alleviate the problem that you haven't thought of
Alternatively, how about lining up all your personal debts in order of cost... ie. which has the highest APR... and prioritising those for when the cheques do come in? It's known as a 'snowball' system whereby you pay the minimum on the cheapest loans and use any spare cash to pay the most you can on the most expensive ones. Eventually, as the expensive loans disappear, you're left with the cheaper ones. There's a calculator here
Final suggestion... could you get a job and bring some extra money in?
FlouncingMinty it's encouraging that someone else has managed it. Is it a joint project with your OH? Do you both support each other with it? I'm trying to do something that is as gormless-proof as possible .
Cogito. CAB etc - not really, we are very lucky in that when DH does get a big payment in, we can chip away at the debt. It really is a problem more of being chaotic than being on a cliff edge. We don't think me getting a job is the answer at the moment. We have 4 DCs and DH's job means that for childcare purposes I'd be on my own. The snowball thing is really helpful - I am going through a few month's bank statements and working out our outgoings, and will set up a budget with repayment priorities from there.
Thanks so much for the advice. It's helping me get a clearer view of the best way of dealing with it
I'd have a look at You Need a Budget. The method might work for you even if you decide not to buy the software. I have to say, though, like many others I have found the software has paid for itself by helping me organise our finances so I can cover the variable element of it more easily - not as extreme as yours as I do have a monthly salary but even so.
Have a look at some of the videos. In principle you should be aiming to live on last month's salary this month, so that you're working with money that's already in hand. Build up savings in categories where you know the outgoings aren't monthly (e.g. road tax, or big ticket house items). And account for the salary at the start of the month, so you can adjust accordingly during it.
On a general note, it can be helpful to separate out your spending into different accounts, so you can see how much you have left. But budgeting can remove the need for separate accounts because the money is already separated out so you can see what's what.
Others have given you very good advice on how to budget, so I'll leave that alone. However for you, right now, the problem is that you are tackling this from the wrong end - you are in debt, and it is hard to budget when you are in debt.
You need to put yourself on a money diet for a minimum of 3 months, in order to get ahead and then you can properly budget.
Money diet can include (but not limited to):
going no frills on our food and working your way through your store cupboard/freezer;
no new clothes shopping;
mend and make do;
making lunches to take to work/school;
combining a number of excursions in one car trip to save on fuel and parking expenses
planning trips in advance and prebuying tickets at a cheaper rate;
coordinating business meetings - seeing 2 or 3 clients in the one trip instead of just the one;
researching where the nearest supermarket is or cheap cafe/restaurant is rather than your DH eating wherever convenient;
pack tea bags/coffee sachets and horlicks/hot chocolate with DH's toiletries - maybe even a small bottle of wine - less tempting for him to head down to the bar or order a hot drink (last trip to Oz DH's room service horlicks cost him $5!!!!)
contact a hotel chain and see if you can pre-buy a number of nights at their chain to be used as needed, or a local B&B might be cheaper - they might be willing to do cheaper rates if he goes there frequently enough;
examine all his subscriptions and memberships - par them down to essentials only - some companies might give you a discount for the next year if you tell them you will be cancelling;
investigate club memberships - if they have a club house with accommodation in cities where your DH travels frequently he could end up saving quite a bit;
spend some time researching .
One of the simple things my DH has started doing is I bought him a pile of disposable paper hot drink cups and in the morning he makes a coffee to go and takes it on the train with him - it has saved quite a bit over the last few months.
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