Inconsistent income

[scout8]

DH and I are both self employed and our annual income is different every year. I really struggle with a budget, in particular how much to allocate for retirement and an emergency fund.

I get so nervous that we are going to have a bad year that I end up putting way too much in the e-fund and not nearly enough in retirement.

Anyone else in this situation? How do you decide what to do? Or, are there any books or resources for managing money when income is all over the place?

[pitterwoo]

we are both self employed, but my income is predicable. when it wasn't though I got in the habit of having a huge efund so I could go without getting paid for 6 months at a time. I still like to have a large efund, so I think you should continue to do that. Is your issue that you aren't sure how big your efund should be? I think you need to decide how many months you might not have income and need to cover from savings and once you've saved that amount put everything towards retirement.

[pamela]

Dave Ramsey has a form in his Total Money Makeover book for planning with an inconsitent income. Basically his strategy is to line up your budget with needs at the top, then work your way down based on how much money there is that month. He focuses on monthly planning, not so much yearly, because that allows you to really know what's coming at you and stick to it.

I'd set some overall goals for eFund/retirement, but put that money into your efund early on and then reconcile as you get towards the end of the year depending on how things pan out. That way the money stays available until you know what you'll need that year, but still make the adjustments in time for tax purposes.

[scout8]

Thank you both! You were very helpful.

Pitterbull, I think you got right at the root of my problem. I have a hard time knowing what I should keep in the e-fund. I end up keeping too much there and am behind in retirement. I think I need to come up with an e-fund amount where I feel comfortable and then stick to it. Everything else needs to start getting funded to retirement. We are meeting with our financial planner tomorrow so we will discuss this with him as well.

[pitterwoo]

Jan 8, 2013 10:07:16 GMT -5 scout8 said:

Thank you both! You were very helpful.

Pitterbull, I think you got right at the root of my problem. I have a hard time knowing what I should keep in the e-fund. I end up keeping too much there and am behind in retirement. I think I need to come up with an e-fund amount where I feel comfortable and then stick to it. Everything else needs to start getting funded to retirement. We are meeting with our financial planner tomorrow so we will discuss this with him as well.

Good luck with the FP tomorrow hopefully that will make you feel like you're on the right course. Once you get a number in mind for the efund you should be able to feel more free to save for retirement and not be worried about your income variability. At least that's how it is for me. I actually really like not feeling like I'm waiting for a paycheck. Obviously I want to get paid, it's just not a pressing concern.

[SJ]

What kind of retirement plans do you have?

I would strongly urge you to each open a SEP IRA. You can really sock a ton away and you get a deduction for it.

You can still hoard cash in your efund all year, but then at tax prep time, after your returns are finished you will be able to know how much you can put in the SEP. You have to wait for returns because you can put away 25% of your net income, up to a certain figure. Much higher limits than a 401K.

[scout8]

Thanks Sarajoy. We both have Roths and SEPs, but there just isn't enough in them. At my old real estate brokerage, we could have them take a percentage of our commission and put it directly into a SEP account. That worked much better for me. Once I have it deposited in my own account, it is hard for me to move it over to the retirement accounts. Seeing so many of my real estate agent friends file bankruptcy over the last few years scared the crap out of me! I think coming up with an e-fund amount as pitter suggested is a good move. DH and I are going to go through our monthly expenses tonight to come up with a good number.