unpredictable income... how do I budget?

[happydog]

Hi, everyone! I just joined last night, out of desperation, I think. I was up until 5am reading posts here, so I am very grateful that I found all of you. Now, on to my own personal dilemma...

We've always leaned towards being tightwads, but in the past 3 years we have managed to land ourselves in debt (other than a mortgage), for the first time in our lives. It's a very unsettling feeling, and for my own health and sanity, I need to get the finances back under control. We have good retirement accounts started (weren't able to contribute much this year ), and a decent amount of equity in our home, but we are finding that we are cash-poor these days. DD is in college, and the university only accepts cash/check as payment, which has given us a serious cash flow problem. We are also probably overly mortgaged for our income, since we refinanced to a low interest rate 15 year fixed loan nearly 4 years ago. Combine that with our decision several years ago to homeschool, and we are finding it difficult to manage on one income. I am going back to work part time, as a research assistant, for a small software development company. It pays pretty well, and I can do most of it from home, on my own computer.

I need advice on how to budget, because as of this month, DH is entirely self employed, and his income will vary HUGELY from month to month. Some months=no income, and some months=lots of income. My part time work will help, but it will not cover all of our monthly outflow. He has enough work lined up for us to manage the basic monthly expenses between now and next april, but after that, I have no idea. I know that Dave Ramsey recommends a baby emergency fund, but I am wondering if we should first try and get 6 months of mortgage and basic bills socked away before we start on the debt, given the uncertainty of his income.

Any advice would be appreciated.

[lottaLove]

I think that if I were in your position, I would definitely start building up an EF of 6 months living expenses before I worried about that debt. At least if you have these living expenses set aside, you won't be stressing so much about the uncertainty of DH's work. Then, when you have a good month, you can worry about paying down your debt, when you have a bad month, you have your EF to fall back on.

These are just my thoughts, and welcome to the Village!

[happydog]

Hi, lottalove! it's nice to "meet" you! Thank you for your kind reply.

I think I am leaning toward building a solid emergency fund too--it's just so hard to watch that debt just sit there. It's such a psychological drain. Right now, I've got a little over $5K in liquid savings, which is almost enough for 2 months. The problem is, I also am staring at next semester's tuition/room&board bill from the university, which just arrived in my inbox. It's $6100. sigh. It just seems like there's always a bit more going out than we have coming in. This is how the credit card debt got started. The home equity LOC got started when we needed to purchase a vehicle three years ago, and then it crept up when I had a dental emergency, and then again to pay for college expenses for DD...

[FrugalMomof3]

I agree with lottalove, try to get your 6 months of living expenses up first before tackling debt, since your DH has some months were there's no income this will surely come in handy should it be needed.

Pay your debt as you continue you do up until this point and focus on the 6 months of living expenses, since you already have $5000 your almost there and I applaud you on that, congrats, just 4 more months to go and we all know you can do it.

After you've gotten your 6 months of living expenses I would head straight for getting that HELOC out of the way, I had one and I hated it, everything you pay is interest so start putting in double payments or even triple if ya can.

As for your DD college, have you tried for any grants? As for your CC debt you dont seem to have that much only $6700, that's not that bad, I've seen worse than that and everyone I've known has always pulled out of the that.

Most important thing is to keep focused and try your best (I am sure you have done this up until this point) and although at times life my throw you a curve ball we ALL dodge it and get back on track.

[happydog]

Thanks, FrugalMomof3. So, you think the HELOC should be the first to go, even though the credit cards have higher interest rates?

I'm wondering about transferring the HELOC to 0 interest credit cards. Can you even do that? At the very least, I should get the regular credit cards transferred, since the smaller one is at 17% interest and the larger one is at 8%. I just have been reluctant to apply for any more cards, to avoid any temptations to go further into debt. Our credit score is pretty good, but has probably taken a hit for debt to income ratio, in the past three years. We pay everything on time, and we always always pay a little bit more than the minimum payment, which helps keep the credit rating up.

I need to fill out the FAF for DD. Last year, we made just a little bit too much for her to qualify for any financial aid. We are in that middle income bracket where you make too much to qualify, but not enough to comfortably pay for all of it. She goes to a large state university, so financial aid is pretty limited. I really hate the thought of student loans, because I don't want her to start out her independent life already in debt, but realistically, we may not have a choice unless something changes in our financial situation.

We are considering selling the house and downsizing to a much smaller property, but I keep going back to the fact that we have a 5% fixed rate mortgage, and a property we love. Downsizing would give us the capability to pay off all the debt, and still have equity left to use as the downpayment on a smaller property. The trouble is, that mortgage rates have gone up so much that I'm not sure we would stand to gain very much in the long term, with regard to monthly payment obligations. And the idea of a higher interest rate does NOT thrill me.

[FrugalMomof3]

Happydog - I am sure not everyone will agree with me about getting the HELOC out first, I had one and I hated it, it was all interest, so if we paid $225 out of a bill of $200 only $25 was bringing down the principle, a measly $25! We refinanced the heloc, CC bills and first mortgage into 1 mortgage, same term and a lower interest rate and cut our bills down, you might want to think about that. Now all we have is a mortgage so it's a plus.

If you ever want to talk just PM me.

Selling your house might not be in your best interest if you will regret it later on, just think you've made it this far you will continue making it and we are all here when ya need us! (Just this time last year we were drowning in debt, now all we have is a mortgage - thanks for income tax time and re-financing).

[happydog]

Oh, thank you for the encouraging words, FrugalMomof3! Our stupid HELOC minimum payment is $235/mo, with only $74 of that going towards principal. We are just giving the rest to the bank, so I can see your point on paying that one down as fast as possible. At least the finance charges on the credit cards are less than $100/month.

I should look into refinancing, I guess. A new 15 year loan would be financed at about 6.3% right now, with our current credit union. Or, we could take the 30 year loan at a higher rate, so that we wouldn't be locked into such a large required payment each month. That might help until I get a cash reserve built up. Then we could start paying extra towards the principal each month. hmmm...

[Telephus44]

Hi, and welcome to the village!

If I were in your shoes, I would probably refinance to a 30 year mortgage with lower payments. Even if it is a higher interest rate, you can always pay extra and pay it off early, but with an income that varies from month to month the convenience of having a lower monthly payment is probably better for you.

For the same reason I would look into transfering the HELOC to low interest credit cards. You'll probably end up with lower minimum payments. If you do, then this will help with your cash flow situation. I know that opening new credit accounts can be a great temptation, but if you can just treat it like it's the same HELOC bill, cut the card up after you get it in the mail, you should be ok.


Also - I strongly agree with having 6 months of living expense first before trying to attack the debt. Growing up, my father was self-employed and we had good years and bad years. He always had money that was readily available somewhere just in case. I know one year my sister's student loan disbursed differently that he expected and had to come up with $2000 in 4 days, and he did.

Student loans aren't the end of the world, either. If you end up having to take them, then at least you're building credit history for your daughter, the interest is tax deductible, and the interest rates are fairly low (and while they are variable, they're capped at 9%). If I had the choice of selling the house or asking my child to take a student loan, I'd rather keep the house.

[Jerseygirl]

I agree with the others. You might also consider with the summer break coming up (I know it seems forever away, but it really isn't) being straight with your daughter that she needs to make a certain percentage to put toward her schooling for next year. My parents always insisted that I pay for my car expenses, living expenses and books, while they paid my actual tuition. Knowing that ahead of time motivated me to set up a summer job early and seek out used books etc. Good luck with this, you are really not as far behind as you think, you can do it.

[SammeyG]

Welcom to the village. I am somewhat in the same boat. My dh works in construction. So when the weather is bad he dosen't work. Also he gets paid weekly. Like this weeks since that has been fire arm season for deer they took the week of to go hunting. His boss, which is also a good friend of dh, decided to take the week off to go hunting since his boos is a hunter. Which dosen't help in getting a pay check for this past week. Any way just keep reading all the wonderfull post. I know that i have learned alot.

[FrugalWitch]

IS DD working? I believe kids should pay for all (or at least half ) of college expenses. Even if it means going to school part-time and working part-time. It teaches financial responsibility and I believe makes people really value the education as opposed to taking it for granted. JMHO

[happydog]

DD worked during the summer, to pay for her daily expenses and books, and I have been pestering her to get a job all fall. I think I will need to take her door to door to fill out applications during the semester break. We are also telling her that she will need to live at home next year unless she earns the money herself, to live in the dorm or elsewhere. We live in the same city where she goes to school, but we wanted her to have the independence and campus experience that you only get by living in the dorm. Well, she's had her fun now, for two years. It would cut her school costs in half if she lived at home, or at least paid for her housing, so I think she's going to have to suck it up.

[FrugalMomof3]

I think all the advice is great, maybe you should look into refinancing to a longer term since it will cut your bills down by alot and I agree about asking DD to live at home while going to college and make her keep paying for her supplies and books, even maybe see about her helping towards tuition costs.

Where we live and how much we earn there is no way we could afford to pay for our kids college, sounds bad and I wish we could but I feel they should pay for all or the majority of it, since it teaches financial responsibility. My DS is applying to colleges now and with out low income he might not have to pay alot maybe $10,000 for a 4 year college.

Remember to continue to get your 6 months of living expenses in order even if it means refinancing, some say dont refinance but MOST say a HELOC is a pain in the neck and I totally agree, I would totally want to get rid of that as soon as I could and put all that interest I was paying to it towards a refinanced mortgage even if it mean taking a 30 year term and adding to it monthly. By taking a 30 year mortgage and paying it bi-weekly, you but your mortgage term down to about 18 years! Add more to that monthly and you knock it down some more.

Either way, whatever you decide I am sure you will make it work for you, good luck!

[Valerie in WA]

I think you've gotten good general advice about managing your debts and obligations, so I'm going to address living with irregular income.

The way I do it sounds complicated, but it's not, and it's worked well for me.

A freedom account is money set aside for things that you know will come up, but either occur irregularly, or unpredictably. Your dd's tuition is good example of an irregular expense (since most of us budget monthly). Doctors visits and prescriptions are an unpredictible expense. So is car repair. Face it, if your car is over a certain age, you need to figure on repairs being needed. Then when it comes up, you won't need to dip into your EF, you'll have "car repair money" just sitting there waiting to be used.

I use freedom accounts for
*Homeschool curriculum
*Vehicle maintenance, licensing & repairs
*Home repairs
*Medical expenses
*General household furnishings (my blender died last month)
*Clothing
*Kid's sports lessons
*Vacation
*Gifts

So what I do - with irregular income - is extrapolated from the Freedom Account principle. I budget an annual basis. I then take all my annual totals and divide them by 12 months. Self-employed income tax is paid quarterly, but EVERY month, we set aside 1/3 of the quarterly payment. Then when it's due, it's there.

Money from self-employment goes into a business checking account (make sure your dh puts your name on this account, so that if he dies, the money is yours without waiting for probate). Anyway, whenever dh earns money, it goes in there. Every two weeks, he writes a check to the 'house'. That's the money that I use in my household budget. It does not matter if he's been working or not, he'd better have that money there, leftover from the 'big money' month. My household budget never has to adapt to his funky earning cycles.

HOWEVER, this requires your dh to be disciplined. Sometimes my dh spends money out of his business on personal stuff (don't worry, he codes it as such, and doesn't try to deduct it). When he does that, he sometimes comes up tight or short when it's time to pay the 'house.'

Oh, and regarding income tax: set aside more than your accountant tells you to. Trust the voice of experience on that one.

[Scattymum]

Havnt really anything to add but Good luck and Welcome!