How to Use the Cash Envelope Method When Your Income Varies

Budgeting can seem to get a whole lot harder when you are dealing with irregular income. It can make managing your money seem a lot more unpredictable. If you receive daily cash tips, or you get paid every week with paychecks that never seem to be the same, it's easy to feel like you never really have control of your money.

If you think about it, this is another reason why your budget is the most personal thing you can create. Your income – how much it is, how you receive it, when you receive it, and how you budget it, all depends on your own personal circumstances. Your income is specific to you, so it's crucial that you build a budget around that.

Today, I wanted to cover some essential steps you need to have in your budgeting process if you are dealing with fluctuating or unpredictable income.

YOU NEED A BARE-BONES BUDGET

Before you start figuring out your income, you need to determine what you NEED to pay to stay current on your bills. What is the bare minimum amount of money you need to cover your necessary expenses?

Necessary expenses include things like minimum debt payments, car payment, rent or mortgage, your utility bill, insurance costs, child care, and other regular recurring bills.

The problem is that everyone views what's necessary and what's unnecessary differently. So today, when writing out your bare-bones budget, I want you to focus on what you NEED to pay instead of focusing on what you think is “necessary.”

• Read: How to Start Using the Cash Envelope Method

HIGH-PRIORITY BILLS

The first step you need to take is to write down a list of all of your monthly high-priority recurring bills. These are bills that you pay like clockwork and are usually around the same amount every month. These are known as fixed expenses.

With these types of costs, you don't have a lot of control over how much you pay. If you don't know what these bills are and you have never tracked your spending before, you need to compile the last 6 months of bank statements.

On every bank statement highlight expenses that get paid every month. Look for recurring payments from one bank statement to the next, and highlight them as you go along.

Once you have all of your high-priority expenses highlighted, write down a list that includes the expense description, the monthly amount due and the due date.

FLEXIBLE EXPENSES

Now that you have a list of all the bills that NEED to be paid, it's time to move on to your flexible expenses. These are essential expenses that vary in cost each month, like your utilities, monthly grocery or food costs, and gas expenses. You can have a little more control over these types of costs by changing your habits. For example, by turning down your heater by a degree or two in the evening or using coupons for your purchases can help decrease these flexible costs.

Keep in mind, that even though these costs might vary from month-to-month, they are essential to your way of life. For instance, you can't live without spending money on food.

Tracking your spending is vital when figuring out how much you need to spend on these expenses. But if you are just starting out, take the last three months of bank statements and highlight all of these transactions on your statements. Add up each highlighted line on each monthly bank statement to get an idea of how much you are spending on these costs. I suggest using the average of each monthly statement for each cost.

Once you have an average amount of how much you are spending monthly on your flexible expenses, add them to your list of high-priority expenses. Add the flexible expense description and the monthly amount. You won't have a monthly due date on your flexible expenses.

• Read: How to Budget Your Income and Expenses

PAYING CASH OR USING YOUR CHECKING ACCOUNT

I pay all of my regular bills online using my checking account. Trust me, this will make your life so much easier. Just because you are using the cash envelope method doesn't mean that everything needs to be paid in cash.

Write down on your High-Expense Worksheet how you want to pay each expense. If it's a bill that can be paid online, write “account” on your worksheet. Write down “cash” for all of your other essential expenses. Things like food and gas can be paid in cash, and you will see in just a bit that these are great categories for your cash envelopes.

USE A CALENDAR

The one thing that has helped me with my budget and paying bills is using a calendar to list out my expenses and the amount due. I also write on my calendar which days I get paid and the budgeted amount I am using for my income on those days.

For me, I get paid on the 5th and the 20th of every month. I also have an estimated income amount that I use for my budget that I write down on those days. My worse case scenario is 80 hours per paycheck. Some of the paychecks I receive end up being for 88 or 96 hours, depending on how many days are in the month, but no matter what I ACTUALLY receive, I always budget for the minimum amount of hours that I work, which is 80 hours. I will talk about what to do if your income is different than your budgeted amount in a second, but for now, only worry about the minimum amount that you can receive for your income.

LET'S LOOK AT AN EXAMPLE

In the example above, I am showing you how you would plan out your bill payments if you have daily income. For instance, I am using daily cash tips. If you rely on tips, or if your income varies daily, you need to figure out what days you want to pay bills, and then from there, you need to figure out what income you need to use and what the total cost of your bills are going to be for that time frame.

In the example, I get a base paycheck twice a month (on the 1st and 15th), and I also receive a daily income that varies. I choose to pay my bills on three different days, however, the last bill payment day on the 28th, I will not have to pull out cash for my envelopes because I am only covering two bills that can be paid online.

With my first bill payment date on the 5th, I have decided to pay six different bills:

1. Credit Card #2 Minimum Payment = $30
2. Dental Insurance = $28
3. Utilities = $150 (using an estimate based on past payments)
4. Netflix = $12
5. Car Payment = $350
6. Student Loan Minimum Payment = $250

I am using my base income paycheck that I receive on the 1st, as well as any daily tips or income I received up through 5th. So my total income that I would be using on my bill payment date on the 5th would be $950+$80+$75+$80 = $1,185. If you subtract all of the bills that are listed above, you have $365 leftover to use for your cash envelopes.

With my second bill payment date on the 20th, I have decided to pay six different bills:

1. Internet = $60
2. Medical Bill Minimum Payment = $25
3. Credit Card #1 Minimum Payment = $50
4. Medical Insurance = $205
5. Car Insurance = $100

I am using only my daily income (tips) to pay for the bills listed above since my base income paycheck that I receive on the 15th needs to be used to cover next month's rent and childcare. So my total income that I would be using on my bill payment date on the 20th would be all of my daily tips from the 5th through the 20th $100+$75+$90+$100+$75$+$60+$90+$90+$100+$75+$90 = $945. If you subtract all of the bills that are listed above, you have $505 leftover to use for your cash envelopes.

With the tips you receive on the 21st, since it's the day after my bill payment date on the 20th, I would leave those tips in your checking account as a cushion, just in case one of the bills you pay online is bigger than expected, or you have an unexpected expense that's pulled from your checking account. I always suggest having a checking account cushion just in case.

For the last bill payment date on the 28th, you have to pay for your rent and childcare that's due on the 1st for the following month.

1. Rent = $850
2. Childcare = $200

You would use your base paycheck on the 15th and all daily tips from the 24th through the 28th, which makes your total income for your last bill payment date on the 28th =$1,315 ($950+$100+$90+$75+$100+$90). If you subtract your rent and childcare, that leaves you with $265 to use for any extra debt payments or savings contributions.

THERE'S NO RIGHT OR WRONG WAY

One of the most important things to remember about budgeting is that there is no right or wrong way to do it. You need to figure out a method and strategy that fits with what's happening in your real life, and then make a conscious decision to stick to it.

With the example above, there are hundreds of different ways you could go about paying your bills. You could use different paychecks to pay different bills. The point is, your situation is unique, and the example above is just a visual to show you ONE of the ways you could use daily income to budget your money.

If you sit down with your calendar and decide to go about it differently, then that's okay too. Maybe you want to use all of your daily tips throughout the month to cover next month's rent and childcare and use your base paychecks to cover all of your bills. It's a game of trial and error to find out which options work best for you because each option and scenario you choose will give you different results when it comes to how much income you have leftover to use for variable spending and your cash envelopes.

• Read: How to Make a Realistic Budget That Actually Works

KNOWING WHEN TO PAY THE BILLS

After having everything written down on your calendar, you need to decide which days you want to pay the bills and pull out cash for your cash envelopes.

For me, I do it when I get paid, which is on the 5th and the 20th. But what happens when you get paid five times a month or are even dealing with income that you receive daily?

To simplify your bill paying process, I suggest choosing two days every month that you designate to paying the bills and going to the bank to pull out cash for your envelopes.

Choose which bills you want to pay on those days, and then make a trip to the bank to pull out cash for your envelopes. Doing it this way, simplifies your process, and you will make fewer trips to the bank.

IF YOU HAVE DAILY CASH TIPS

If you are paid daily, in cash for tips, for example, you need to save up your daily income and only use it on your designated bill paying days. I know a lot of people who are in the service industry who rely on their tips to survive financially. Using only their base paychecks just isn't enough. In this case, you need to use the worse case scenario for your base pay, write that on your calendar and then use your calendar to log any daily income. Then, on your designated bill paying days, bring all of your cash tips to the bank and deposit that cash into your checking account, or the account that you use to pay your bills.

You would then pull out any cash you need to cover your cash envelopes and use the cash in your checking account to pay your high-priority expenses (not your flexible expenses). Now, you are probably wondering, “why don't you just use your cash tips for filling your cash envelopes?”

For me, I like to have a clear trail on my bank statements. If you are using your cash tips to fill your cash envelopes, you might not have enough in tips to cover all of your envelopes. If you deposit all of your cash tips, it's a clear transaction to show your income. When you pull out cash for your envelopes, it's a clear transaction of how much you needed to cover your envelopes. It shows one clear transaction for each step.

This is just my opinion, and how I like to see things. If you want to use your cash tips for your cash envelopes, and then decide how much you need to leave in your checking account or how much left you need to pull out for your cash envelopes, you can do this too.

• Read: How to Create a Visual Method for Tracking Your Spending

KNOWING YOUR INCOME

After completing the steps above, you should now have a list that contains your high-priority bills and your essential flexible spending expenses. You should also now know which essential expenses you will pay with your checking account, and which things you want to pay cash for. This list tells you exactly what your income needs to cover for the month.

There are many scenarios when it comes to income. Some people get paid every day in tips and need to budget their daily cash income. Some people get paid 5 times a month, and each paycheck is different.

No matter what circumstance you're dealing with, the number one thing to remember with fluctuating income is ALWAYS to budget your income using the worst case scenario. What do I mean by this?

If you use the smallest amount you expect to take home for your income, you set yourself up to make sure that all of your expenses can be covered. Then, if and when you have leftover income, you can use it to cover variable spending like fun, miscellaneous, coffee, and clothing expenses.

• Resource: Use Steady to find side gigs and make extra money.

USING CASH ENVELOPES WHEN YOUR INCOME VARIES

The cash that you use for your cash envelopes is income that is left over after all of your high-priority bills are paid. Like I mentioned earlier, some of your high-priority expenses, like food and gas, can be used as cash envelopes to help control your spending. I have found that this is very beneficial for my monthly food spending. If you have leftover income after everything has been paid, that's when you need to start the process of figuring out where it will go.

If your income varies, there are two important things to remember.

1. Focus on paying your high-priority expenses first, and then worry about organizing your leftover income using the cash envelope method.
2. Savings is crucially important. A funded savings account can save you when your income comes up short one month.

If you are ready for that next step, this article will help you. But if your income varies, it's important to focus on the things that need to be paid first. Once you have those priority expenses covered, then you can move on to creating a plan for the rest of your spending, saving, and any extra debt payments.

To watch a short video tutorial on the example posted in this article, make sure to head over to my IGTV channel on Instagram, or click the video below!