When paycheck and bill schedules don’t mesh

It would be easy to manage household finances if paycheck cycles meshed with bill cycles.

They don’t.

The paycheck or other income may come once a month, twice a month, once a semester, once every two weeks, once a week, during “the tourist / holiday / business season,” whenever the clients decide to pay you, or any combination of the above.

The bills may come once a quarter, once every six months, once a semester, once a year, once a month, once a week, whenever the kids say “I need $20,” payable whenever a major repair comes up, or any combination of the above.

If you have ever tried to set up a month-to-month household budget plan, and I’ve fiddled with that task over the years, the math can really frustrate the heck out of the family bookkeeper.

Most household budget systems are set up on a month-to-month system. Most financial aid applications ask clients to list their household income and bills either by month or by year. That means when you are looking at that spreadsheet, you need to convert any income and expense amounts that happen on different cycles to the appropriate cycle. For example:

• There are normally 52 weekly paychecks in a year. You will occasionally find 53 paychecks in a year, but ignore that detail except for the years it comes up. The business accountants have to work around that one, too!
• If you need to convert weeks to month, I’ve always used the formula of 4.2 weeks in a month. But the ConvertUnits site says the accurate figure is 4.3.
• The number of days in each month does vary; but there always are at least 28 days and no more than 31 days.
• If the bill only comes due during certain months (example: car insurance), then figure out the annual amount and divide by 12 for the monthly amount.

Here is another scenario: if you are paid weekly, there will be certain months during the year in which you have five pay cycles instead of four. One of my readers and I were talking about that situation this week.

One way to handle the cash flow is use that fifth-week paycheck to pay for bills that don’t come up every month such as car maintenance and repair, the quarterly water / sewer bill, or Christmas presents. You could also use that fifth week paycheck to stock up on groceries or pay down debt.

What if your income fluctuates or is unpredictable? This has always been applicable to those who are self-employed or work in sales. But the situation is not limited to that audience.

This past year, a lot of Michigan residents had to deal with furloughs and temporary layoffs even if they were technically still employed (result: lower income). Parents who receive child support payments may have to work a household budget around late or missing payments when the other parent has job issues. College students are not able to predict in too far in advance what their summer or part-time income will be during a given year.

Here are some practical tips on how to handle the unpredictable income situation:

• Crown Financial Ministries explains how to budget on a fluctuating income.
• Money Crashers has a post on how to put together a budget with irregular income.
• Simple Mom looks at various scenarios on How do you budget with an irregular income? There’s some good comments on her post.
• Getting Finances Done writes about Budgeting on a self-employed or irregular income. Lots of good comments here too.

Continue reading When paycheck and bill schedules don’t mesh …

From Monroe on a Budget.