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Monthly Income

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Remember when I first “auditioned” to start blogging, and I said our monthly take-home pay averaged $5,000/month?

Then, aside from that first month, our income has been WELL over the $5,000 mark and every month I talk about how this is very atypical and much higher than average. I have stressed this because I don’t want readers to think I was lying in my original post. I certainly was not. I track all of our income and expenses (even before starting to be strict about a budget), so here’s a little snippet of our (net) income for 2013 versus 2014 comparing the months since I started blogging here about our debt.

 

 20132014
February$3795$5465
March$882$7595
April$5232$8290
May$4883$10965

 

We had several months with abysmal income in 2013. I was still a graduate student so I made very little, and Chris’ income could fluctuate wildly. In March 2013 he actually had a net negative income for the month due to a myriad of business expenses, so our income was tiny. There were also a handful of months with income only in the $2,000ish range. By comparison, you can see that our 2014 income has been steadily rising every month. One reader asked a great question – “how will you keep your income up?” I want to address that here.

There are a couple important changes that have taken place that will hopefully provide a big positive impact on our income. First, I’ve already mentioned how I have taken on additional work. This is great because it has helped balance out some of the “ups” and “downs” of our unsteady income. Just as an aside, I did not get paid this month from either University A or University B (my two contract-based jobs). I’ve continued doing work but this is just a timing thing with the schedule of payments. But, instead of making nothing, I was able to bring home that giant paycheck I mentioned. So our income had a bit of a “buffer” even though I didn’t get my two regular paychecks. I have also continued to take on little side-ventures to earn a hundred dollars extra here or there. Everything adds up over time. So I have taken great strides to increase my income.

In addition to the pay I generate, my husband has also taken some strides toward increasing his income. Remember that he owns a small wood-flooring business. Until recently, it has only been him and one other employee and he has done everything himself (e.g., placing bids, doing scheduling, and completing the actual work). But at the end of March he hired two additional workers. Now he has 2 “crews” of people to complete jobs. Instead of only being able to do a single job at a time, he can be on a job with his “helper” (it’s called a “helper” in his field, but you could also call the person an apprentice or simply an employee), while another crew (“boss” and “helper”) works simultaneously on a different job. By being able to work on multiple jobs at a time, my husband has increased his business profits and has started bringing home additional money.

Nothing is guaranteed and things can certainly change. For instance, all of the research I do for University B is grant-funded by large government grants. When the funds are gone, they have no way to pay me. So far, they have excelled at obtaining grants so my work has been steady, but there is no guarantee of future work

And my husband’s job has even more potential volatility. The second crew he has working for him currently have been great. They do good quality work in a timely manner and my husband has been pleased with their progress. But, without going into too much detail, my husband had tried to expand his business once before (about two years ago), with disastrous consequences. He hired too many people too quickly and was unable to oversee everyone properly. People did poor work and it ended up costing my husband thousands of dollars to replace entire floors (since he warrantees his company’s work). This was a painful lesson to learn. He had to let everyone go (except his one “helper”) and go back to a small 2-person business. He’s trying not to repeat mistakes and this time around he took great time and care to select a skilled and highly qualified person to run the second crew. So far there haven’t been any problems, but there are still no guarantees (and, of course, even good employees can always quit or leave, so even if the crew does good work the income generated from them is still not guaranteed).

Where does this leave us in terms of our income?

Well, we’re not really sure what our new monthly “average” income is. The plan is to continue operating based on our standard budget, which assumed we made only $5,000/month (although, note, we have increased money allocated toward debt and savings so our total budgeted expenses actually amount to $5272/month). The hope is that if we can keep our spending down and continue bringing home a larger-than-usual income then we can keep funneling extra money toward debt every month.

For reference:  Our new budget (reflecting some of the changes mentioned this morning)

PlaceFunds Budgeted
Rent1055
Electricity150
Water75
Natural gas25
Sprint (2 lines)115
Cable/Internet85
Car Insurance90
Health Insurance350
Trash35
Debt1697
Miscellaneous250
Groceries380
Baby Purchases600
Gasoline100
Saving for Irregular Expenses265
Total Budgeted5272

What does all this mean for the month of May?

We did well! Best month on record for our pay! We earned $10965. Subtract $8967 (for our expenses…note this is a hugely inflated number due to massive debt payments, plus going over on our monthly envelopes), and we are left with $1998 surplus for the month of May. Two things to note:

  1. This means I don’t have to dip into June money in order to “pay myself back” for the huge payment I sent to Wells Fargo in May (recall that I had sent a huge check and thought that if our May surplus wasn’t enough to justify it, that I would use funds from June to “pay myself back.” Since our income was high enough in May, I won’t have to dip into June funds to cover this money).
  2. Even after paying a HUGE quantity toward debt, we still have some excess to the tune of $1998. Guess what guys….this means BoA is 100% for sure GONE this month! I currently owe $2154. I have the $1005 regular payment + I can use $1149 from the May surplus to pay off Bank of America in full. I’ll still be left with an extra $849 that I believe will be sent to savings (though it may also be allocated toward debt. Need to have a budget meeting with the hubs).

I cannot believe I am so close to being credit-card debt free!!! This is a huge accomplishment and one that deserves a bit of celebration. I talked to my husband about it and although definitive plans have not been set yet, I think we’re going to take a mini-trip to visit family in Utah for 4th of July. My Dad has been asking us to come and graciously offered to cover gas money (plus allow us to stay with him, instead of getting a hotel). With gas covered the costs would be relatively minimal. The largest cost would be in missed work for the husband (although, he does have that second crew now, so he will continue bringing in at least some income). We’ll discuss the details, but I think we may plan that as a celebration of being out of credit card debt. We still have a LONG way to go until we can say we’re totally debt free, but this is a big milestone and I want to celebrate it in some way. A short family trip to Utah seems like a good way to do it without breaking the bank.

Whew! That was a long one! If you stuck around the whole time you deserve a gold star!

Give me your thoughts!

Our variable income has been on the rise. How/when would you conclude what your new “normal” is? If we can say “we now make an average of $6,000 or $7,000 per month” (or whatever) then we can allocate more funds directly toward debt (rather than waiting until the end of the month to make snowflake payments). How would you handle this? How long does it take to determine our new normal?


32 Comments

  • Reply TPol |

    I love to read these well written, well planned and long posts. First of all, I would like to congratulate you on the great job you have done.

    I think an inexpensive and well planned trip to visit family for the 4th of July is totally deserved and justifiable.

    Now, my apologies for the long comment below:

    As for your question, I think it is tough to decide what your new normal income is. I was in a similar situation when I started working part time. I would say, you will know your new normal within a year or so but even then, the number of variables make it difficult to assess that number. Being an extremely cautious and risk averse person, I would pretend that my income at 5,000 is not changed if I were you.

    Here is what I do: I have some passive income which does not cover all my living expenses so, I budgeted the entire year’s cost of living plus a percentage for risk and subtracted that amount from my passive income. I saved enough money to cover the difference as my EF. I do not touch that money. I stick to my budget and the surplus I bring in goes directly to savings so, in a way I do not ever relax my budget. May be in a couple of years I will feel safer and relax a little bit. As you see, I do not look for a new normal. In your case, with your little ones and with lots of variables, you want to get rid of as much debt as you can while saving which is what you are doing so, I think, you are on the right track. Never mind the new normal.

    • Reply Ashley |

      Thanks, TPol! So I’m assuming you’re debt-free since the surplus is going toward EF. This is something my husband and I have been going back-and-forth about (saving vs. paying extra toward debt). If you had debt….would you put the full surplus toward debt or continue putting some in savings? We’ve built up a reasonable EF (approx 3 months living expenses), but given husband’s health concerns, young children, etc., I feel like I’m pretty risk-averse in this regard and would prefer to continue stashing some in savings. Would you do a certain percentage of surplus or a set dollar amount? Ideally, I’d like to have 6 months of living expenses in an EF, but I struggle with the savings vs debt decision since interest on our savings is MUCH lower than the interest incurred on our debts. : /

      • Reply TPol |

        If I had debt, I would allocate three quarters of the surplus to the debt and a quarter to savings. I have just recently become debt free so that was pretty much what I had done in the past. At one point my EF was totally funded and when that happened I still added one quarter of the surplus to savings or investments or retirement.

        I am debt free but I am 47 and I have always been single/no kids so, it is not a major accomplishment but, I never racked up credit card debt. I am very very scared of debt and even good debt (mortgage) is bad in my book. Now I am saving for a kitchen renovation in 2016 or 2017, a new car probably in 2018 and a long nice road trip in the US. The road trip is on top of my bucket list:) I would never get loans for any of these.

        • Reply Ashley |

          Congrats on being debt-free and saving for big expenses instead of financing them! Good for you!
          I think I like this split (75/25 for debt/savings). I saw many people suggest a 50/50 split, but that feels unsatisfying because I want to use those funds for DEBT! I need to do some calculations to really determine 6 months of living expenses (not 6 months of INCOME, but just of basic expenses) so I can try to set that as a savings goal. In the meantime, I still prefer to put more toward debt than savings but I also think savings is important.

  • Reply Jill |

    I don’t see how changing the income line in your budget changes much from what you are doing now– excess goes to debt. If you increase the income, the debt repayment would increase, right? I assume so since you’re determined to retire the debt! Awesome job, keep up the good work! And, as a travel lover, I think a trip to visit family is not out of line!

    • Reply Ashley |

      Yes, you’re right. I think the main difference is that I’ve been having a tough time waiting until the end of the month to use the surplus on debt. I would prefer to simply increase the amount budgeted toward debt each month so I can make payments during the current month (instead of waiting until the month is over and making 1-time snowflake payments). Paying during the month would also save a few bucks on interest instead of holding our funds until the end of the month. I don’t think it would make an astronomical difference in terms of interest saved, but it would make a big difference psychologically (to pay the debts down earlier in the month rather than sit around and wait)

  • Reply Rachel |

    I agree with TPol — love to read your well-articulated, well-planned posts.

    I understand about being conflicted between savings and debt payment. As a compromise with your husband, maybe you could do 10% or 25% of the excess go towards savings, and then the rest go towards debt until you fill up your emergency fund? Just negotiate over the percentage, and then you don’t have to re-negotiate how to split any excess funds every month. As you have young kids and your husband owns his own business with variable income, I understand wanting to build your EF up.

    As far as when to switch to the new normal… that’s a tough one! I’m pretty risk-averse, and so I’d wait a while before switching….but how long? You and your husband have the best sense of whether or not expanding is working and how much risk is involved. Also, is his work effected by seasons? If so, I’d budget on the smaller amount of expected work.

    A budget-friendly vacation as a reward sounds really nice! I hope your family enjoys it!!!

  • Reply scarr |

    Thanks for a great post. I think you bring up an excellent question: when do you declare your new normal? Tpol had some good thoughts on the subject. I would probably give the income 3-4 months before changing my income expectations and even after that I’d only increase debt repayment or savings for another 3-4 months. What I mean by that is that I would not give any other category an increased budget: like food or entertainment, etc.

    Congratulations on all the awesome work you have done the past few months!

  • Reply Mary from SC |

    Wow and congratulations!!! You guys have kicked some serious debt rather quickly. I know that the CC debt was your primary goal but I do hope you will maintain your focus and your sense of urgency now that it will soon be gone!!! With that mindset, you will be amazed how fast you can knock out your other debts. What will you tackle next? You may have mentioned this. I was thinking the license fees…to get rid of that monthly reminder would have to feel good. Whatever you do, keep up the intensity. My suggestion would be to maintain the $5,000 as your projected budget and just snowball at the end of the month. That way, you are prepared in case you have a “lesser month”. Again – great job guys!!!

  • Reply Sak |

    I run a business and do contract work and so I would suggest a few things. Because sometimes it is feast, sometimes famine and you don’t always know. See how the next few months go and if the pay seems to have gone up permanently – assume half is available for your debt and throw half into savings until you have at least 6 months of savings. I don’t remember if your husband has short term disability insurance in case he gets injured or sick but it doesn’t hurt to have a cushion in case something goes wrong, once you have 6 months saved – start throwing all at debt. If the increase in pay was permanent – that won’t take long!

    • Reply Ashley |

      I really like this idea! During the “feast” times its all too easy to forget about the “famine” that can happen, too!

  • Reply AS |

    First of all, well done!

    Second of all, it would seem like there is no need — or certainly no urgency — to declare a new normal. Keep your budget on your baseline or very close to it so that all the excess goes to debt.

    At first I was going to argue that you could make extra payments with “extra leftover money” immediately after payday (you know how much you expect in income, so the minute the funds hit the bank you know your income). Then I changed my mind: if you make the payments early, then what happens if you smash your cell phone screen again on the 29th of the month? Or another unplanned expense. Are you then at risk of hitting the emergency fund, or having to ‘borrow’ from the next month? That’s worse for your stress than waiting 2 weeks of interest on a couple of K.

  • Reply Cissy |

    Hi Ashley!

    The first rule about getting out of debt- spend less money. The second rule- make more money. Way to go on both! It’s very exciting to follow along on your journey.

    As for new normal, I think it’s not too crazy to assume what you have going now is it- your husband learned the formula for success the hard way, so I’m sure he will be able to manage the second crew (whether this same one or the next) in a manner that will allow your income to stay at higher levels. And it sounds like your job is as secure as any, really. I think you guys are just starting to find your potential.

    With that in mind, I would keep adding money to debt, but I would also start a fund to support the growth of your husband’s business- money specifically to tide you over should your other crew be temporarily sidelined, or money to add to company staff, such as another crew or an office manager to do the paperwork and track done leads so your husband can concentrate on the work side. I admit I am on the risk tolerant side of things, but I think you guys are in a great position to myself up to excel at rule number two!

  • Reply Kili |

    Hi Ashley,
    I was thinking if it’s of any help to increase the “new normal” by a smaller amount each month…
    say ~$250
    So:
    June $5250
    July $5500
    August $5750
    etc.
    This way you’d slowly approach a higher number & if things don’t go so well one month, you can just either leave the new normal at the current number for another month or two.
    But: This also might be somewhat pointless & make things more complicated than easy…
    Maybe it’s easiest & safest to stick with the current normal & think about the new normal again in 6 months.

    • Reply Ashley |

      That’s a good point, too. I think a couple of people have said to wait 6 months (or even a year) to determine the new normal. It’s so tricky with variable incomes!

  • Reply Juhli |

    You are making wonderful progress and others have given you great ideas about how to allocate your increased cash flow. I notice though that you don’t show estimated income taxes as a budget item. Is this handled prior to determining your monthly income or do you take it out of savings? Underestimating and underpaying could really throw your finances in the ditch come tax time.

    • Reply Ashley |

      All the income I have shown has been “net.” We pay estimated quarterly taxes that I have in a separate account (I remove from each paycheck as soon as we receive it and “hold” until the quarterly payment). Last year we were a little “off” (by about $400), so I mentioned taxes when I had to use $400 of our surplus toward back taxes. But aside from that, I haven’t addressed taxes since I set that money aside and don’t include it as part of our income.

  • Reply Hannah |

    I vote with those who said to just keep living like $5000 is your normal. I think you should split any money left over at the end of the month 50/50 to savings/debt until you have 6 months expenses saved up.
    With your demographics its very important to have that cash savings. Also someone brought up a good point. Do both of you have disability insurance? Or at least your spouse?
    My husband has been knocked out twice with cancer and it really took a toll on our income and savings. It will also make life insurance cost a lot more now. If,you get such things now you’ll save on premiums.

    • Reply Ashley |

      So sorry for your husband! This is definitely something we need to do – especially now that we have kids its irresponsible not to, but currently neither of us have life or disability insurance. We’ve talked a lot about needing to get a life insurance policy, but we haven’t even really discussed disability. We do have an “insurance guy” (mostly for business insurance stuff), so we need to give him a call. There’s really no excuse to keep delaying : /

      • Reply Walnut |

        Even if you don’t act on purchasing life or disability insurance, I think it is good to know what it costs so you can plan accordingly. Life insurance/disability insurance/retirement savings are all things you’ll want to think about using some of the extra income for when the time is right.

        • Reply Mary from SC |

          I think life insurance should be a priority. At your age and health, term life would be a minimal cost. If something happened to you, I am assuming your student loan debt would be “forgiven” so to speak but still your husband would have to arrange for full time child care, etc. as well as cover what other debt is still owed. If your husband passed away, you would be left with all the bills, including student loan debt on your salary alone. No one likes to think this could happen to them…but sadly it does. Long term disability is also something that needs to be considered seriously but I would say the life insurance should be top priority. On that note, if you guys don’t have a will drawn up, I would encourage you to do that ASAP. You can find many templates online or find a lawyer that can do one at minimal expense. The peace of mind it brings knowing that your have been made known and will be followed is great! We even went so far as to stipulate what happens in the event of life support issues, etc. My husband HAD to make that decision with both of his parents and it was a heavy burden. We have everything in writing so our children will NEVER be put in that situation of having to decide end of life issues for us. Sorry if this is heavy, but part of financial independence is planning for these events as well.

          • Ashley |

            You’re right that this is not a “fun” topic to talk about, but its certainly an important part of personal finance and begs consideration particularly at this stage of life now that we have kids!

      • Reply hannah |

        Oh my, if you don’t have life insurance you need to make that call tomorrow! What if both of you died? The twins would be dependent on a relative for financial care and everything else.
        Life insurance when you’re healthy is rather cheap – when I switched auto insurance they were offering it for $40/month.
        Just make sure you get term life, none of this whole life stuff.

  • Reply Meghan |

    Hi Ashley-

    I agree with the others, I love how well-written and well-planned your posts always seem to be!

    Moving on, I think you should consider staying at your current normal for the most part, you have been kicking debt’s butt so much that I would not begrudge you increasing a line such as eating out by $25-$75 dollars. While it is important to get out of debt, it can get frustrating when you are working so hard to make such large debt payments and don’t have anything to show for it at all.

    The way I understood your writing, you want to increase your budget so you can make more snowflakes throughout the month instead of waiting until the end. There are four thoughts that have me encouraging these snowflake payments throughout the month without needing to increase the budget: 1 – you seem to have a really good grasp of your finances and I think you can make reasonable guesses as to what you can put toward a snowflake without waiting until the end of the month; 2 – as you are putting a percentage of this extra income toward your EF, if you overestimate on the snowflake then you are just taking away from this money that would have gone into saving; 3 – you do already have a sizeable EF for the short-term, so if you really overestimate your snowflake you do have that money you can dip into to cover expenses; 4 – you have mentioned working on picking up little jobs for $100 or so, if you overestimate it may be the incentive to find a couple jobs to make up that amount.

    I would say put 10% of the extra toward the EF and the rest toward debt. (Though if you are paying extra snowflakes throughout the month you could plan for 25% to go to the EF, then at the end of the month when all the income is accounted for you can make an extra snowflake to bring it down to 10%. That way if you overestimate on your payment you are not dipping into official EF funds).

    All that being said, I definitely encourage looking into some type of life insurance plan. It is not guaranteed that your student loans get wiped out if you pass, they could get put onto your husband. Also, just the cost of a funeral can be astronomical, if nothing else, look into a smaller policy that would cover those costs and say a year of living expenses. Also, with the kids you definitely need to have a plan if something happens to both of you. Even if you already have another couple in mind to take the girls if something happens to you, it must be in writing! Unless there is something official, any family member could petition the courts to get the girls, while its unlikely, they could end up in foster care for years while family members fight over who gets to raise them! (You can find simple forms online that you just print off and fill in the blanks). Also, be sure you let important people know your plan for the girls if anything happens to you and your husband, such as your parents and siblings, and while this seems obvious, be sure you ask the people you would want to raise your daughters if they would be willing to take on that obligation!

    Cheers,

    Meghan

    • Reply Ashley |

      Ugh! I know, its so hard to talk about this stuff (re: life insurance/plans) but it’s been irresponsible of us not to have this already taken care of! In terms of the budget and debt payments, these sound like some good options for us. You’re right that I was thinking primarily of raising the amount budgeted toward debt (not other line items at this time…aside from savings I suppose), and what you have suggested sounds like a good way of being able to do that (even mid-month) without getting into trouble. Thanks for the advice!

  • Reply Morgan |

    I wonder if the YNAB method would work for you? The idea of living this month on what you made last month. That way you know exactly how much you have to work with, and can pay bills, make large snowflake payments, save, etc, as soon as you would like. My husband has an extremely variable income, so much so that this is the only system that works for us. Now I pay ourselves a base salary every month, with last months earnings, and save all the surplus( the surplus is whats left after all fixed expenses,variable expenses and savings) that way, if for some reason his pay doesn’t meet our basic salary needs, I can quickly transfer out of the surplus fund, and not touch the EF savings. Some months the surplus is nothing, some months is $700+. I was having a hard time dealing with his widely fluctuating income until we adopted this system.

    • Reply Ashley |

      I’ve heard of this but haven’t tried to implement it. I think it sounds like a great idea, but I’m sure the transition is tough. How does that work out (since – wouldn’t that be like making 1 month’s salary last 2 full months during the transition?)

      • Reply Morgan |

        I think the average time to implement is about 4 months,but for us it only took 2, because they happened to be high income months (like you have) so we were able to work quickly. We differ from the YNAB in that we pay ourselves a set salary like I mentioned, but that’s really only to make me happy, I thrive on routine, order and consistency, and having such variable income was making me insane. Also, my husband gets paid weekly, which I was finding to be extremely difficult to juggle what was getting paid each week. Now the monthly bills are paid in the first few days, rather than trying to space/time everything accordingly. I think it might be a good system for you so that you can make big snowflake payments when you want to, with little guesswork.

So, what do you think ?