If you're new to the world of mortgage, kids and all the related responsibilities, budgeting might not be the strongest part of your game. It takes work and discipline, especially if you're trying to come up with a consistent budget that's based on an inconsistent income. If one or both of you earns a tip-based income, that income can vary wildly from week to week or month to month. Having a variable income is certainly inconvenient, but if you persevere you can budget successfully.
Start your planning process by thinking back over the previous months and remembering what you earned in tips on a weekly or monthly basis. Don't base your budget on your average weekly tips. Think about what you earn in a bad week, and base your budget on that. That way, a string of bad weeks won't upset your finances or leave you short of money for the things you need. Keep careful track of your fixed recurring expenses such as housing, transportation, debt payments and utilities. If you don't know your costs, you won't know if you're overspending.
There's a real likelihood that your income during down times might not meet your minimum budgeted costs. If you aren't formally keeping track of your income and how it relates to your expenses, it's easy to get behind on everything. Then, when you have weeks with high income, it all goes to catching up. One of the keys to budgeting successfully on a tip-based income is to get ahead of the bills instead of lagging behind. It'll require some serious discipline at first, especially if you're already playing catch-up. Find ways to be frugal, and cut nonessential spending. During good weeks, bank your surpluses in a "rainy day" account.
Debt and Tip Income
One major key to getting ahead is avoiding debt. People with stable incomes get into debt trouble, too, but at least they know how much income they can plan on. With a roller coaster income, the problem is magnified. If your existing student loans, car loan or mortgage push your low-ball budget to the limit, consumer debt can sink it. Your credit card carrier or finance company will expect a consistent payment on a consistent date and won't be interested in hearing how business is down at the restaurant. Save for your purchases instead of using credit, wherever possible. It'll give you more latitude to deal with low-income periods.
Record-Keeping and Taxes
Keeping careful records is always helpful when you're working from a household budget, but it's vital when your income goes up and down. Don't trust your memory: Use a notebook, a spreadsheet or a personal finance program to track your earnings and spending. The longer you keep track of your finances, the more accurate your budget estimates will be. It's also important for avoiding trouble with the tax man. Use IRS form 4070a to track your tips daily, and form 4070 to report them monthly to your employer. They'll calculate the witholdings necessary to keep you in compliance.
- The Budget Kit: The Common Cents Money Management Workbook; Judy Lawrence
- Gail Vaz-Oxlade.com: Variable Income? You Need a PLAN!
- U.S. Internal Revenue Service: Topic 761 - Tips – Withholding and Reporting
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.