Our family defines the concept of "inconsistent income."
I am an attorney who brings home between $70,000 and $80,000 per year (pretax), depending on my yearly bonus. My husband, John, is an independent contractor in the oil and gas industry, and there is nothing consistent about his job. We never know if and how much he is going to work, where the work will be, or how much he will be paid — that's just the nature of his project-based industry.
I knew this was my husband's chosen career path when we were married in 2010, but it's still hard. We can't plan ahead, which is especially tricky considering that we have a two-year-old son. We can't set a consistent budget. We can't wrap our arms around anything tangible to make financial stress of not knowing what the future has in store for our family go away. It's not easy to create a budget when the "John's income" box is filled in with "???"
When I used to read articles encouraging readers to budget, I always wanted to scream, "I can't!"
At least I did until we found a solution that seems to work for us.
The Trouble With Planning Ahead
In 2010 John worked a solid nine months. That was a great year for our family: We collectively brought home $125,000 before taxes. The next year, we brought home $114,000. In 2012, however, things slowed down for John. He started off the year with a project, but it was short-lived. Our total income dropped to $75,000. The next year was also nothing to write home about — we took home $80,000 in 2013.
This is shaping up to be another big year. If John's new project lasts through the end of the year, our income will be about $140,000. He's constantly looking for part-time work in other fields, but he tries to be upfront about the fact that he may have to leave on short notice if an oil and gas project opens up. This doesn't interest many prospective employers, and we both understand why.
While our income fluctuates greatly, our expenses are pretty much fixed. It costs us about $45,000 per year to live our current lifestyle in a small town outside of Cleveland, including day care, groceries, gasoline, and utilities.
Fortunately the only debt we carry is our mortgage, and we are covered on my law firm's health insurance. John could probably find a more stable job in a different industry, but he loves his career. He also never finished college (he is about a year away from having his bachelor's degree), and while the oil and gas industry is flexible toward education, other industries would likely require a degree for any similarly salaried positions. Plus, there's the opportunity for him to achieve a highly in-demand salaried position, provided he continues to work as a contractor and gain experience and connections.
In years past we frequently dipped into our savings account in order to maintain our lifestyle from the "big" years. We would tell ourselves that we would pay it back when John got another project, but somehow sticking to that plan was hard. We ate out frequently. We had a premium cable package, plus Netflix. We vacationed frequently without really sticking to a budget. While we didn't go into debt, we burned money from our savings account without really knowing where it went.
After the birth of our son in 2012 I was absolutely shocked to find out that I was in for an extra bill of $550 per month for three days of day care per week. At the time I didn't know exactly where our money was going, but I knew that an extra $550 per month would eat into our savings quickly.
To figure out where we would find that cash, I sat down and took a look at a few months of our bills and spending. Let me tell you: It was not pretty. We had burned through over $20,000 of savings in about 11 months. And while it didn't seem lavish at the time, in hindsight those vacations, furnishings, and shopping sprees at Target were exactly that. It was a hard realization that all of the money we took from savings would take years to pay back. We decided right then and there that we would never be reckless about dipping into our savings account ever again.
We decided to minimize our lifestyle so that we could live on my salary alone and devote any of John's income to savings. After taxes, we are usually left with about $45,000 a year from my income, or $3,750 a month.
The first two expenses are taken out of my paycheck before I ever see them: $300 to my law firm's profit-sharing plan (their version of a 401(k)), and $50 to our son's 529 account. The next $1,650 a month goes to our mortgage, real estate taxes and homeowner's insurance. Next comes three days a week of day care (my husband covers the other two days): $550 a month. Our utilities are $500 a month, but vary slightly seasonally, and we spend about $150 a month on gasoline. That leaves us with about $550 a month for groceries, gym membership, car insurance, "fun money," and a slight cushion.
With this lifestyle, we usually end up with an extra $5,000 per year (which is whatever we did not spend above and includes my annual bonus from my firm) to give to charitable causes and further fund our savings and retirement. I have a Roth IRA that I started in college and contribute to when our income allows, plus my company's plan, and John has a SEP IRA that he can contribute to because he is technically self-employed.
In years with particularly big income, we fully fund John's SEP first to the maximum allowable tax credit, which is 20 percent of his net income, then fully fund my profit-sharing plan, which is governed by how much the partners at my law firm contribute. Last year we weren't able to max out the profit-sharing plan, so I contributed about $3,600 and the partners contributed around $20,000 on my behalf.
If there is still money left over, we max out our contributions to our son's 529 plan — Ohio allows an income tax credit of up to $2,000 a year, which we aim for, but more contributions are allowed without tax benefits — in order to get the maximum tax deduction and split the remaining income equally between our savings account (0.8 percent interest) and our Scottrade account (which holds ETFs and we plan to not touch for decades).
Life on a Single Income
I don't really feel deprived, living on one income, but I would certainly make different choices if I knew that our income would rebound next year. I would visit my cousins in New Jersey, my godparents in Washington, D.C., my college friends in San Francisco. I would get my nails done occasionally. I would enroll our son in some enrichment classes and join a local pool for the summer. Certainly we can afford all of the above when John has consistent income, but not during the "lean" years. And truthfully, the fear of those years typically keeps us from indulging in the "extras" even when our income is high.
So we shop at the cheapest grocery store in town (although we don't clip coupons). We take two trips per year that are strictly budgeted — recently, those trips have been to weddings. We live in the same town where we grew up, so we can rely on John's parents to provide free childcare whenever we can. We have a vegetable garden and canned religiously this summer. We keep our son's birthday gifts from family to reuse as Christmas gifts (he's two — he doesn't know the difference) and sell old clothes at consignment shops and old furniture on Craigslist. We do our own landscaping and snow plowing.
We like to think of ourselves as reasonably thrifty with certain indulgences. Unfortunately, being thrifty doesn't always equate to living financially stress-free. In the past two years, we've managed to put away $8,000 of John's hard-earned money by sticking to our frugal lifestyle and pretending that my income is the only income we will ever have.
Sometimes pretending is difficult, because in the back of our minds, we know that John will likely work full time again. But we keep living on my income, because all in all we're very proud to have saved so much during two lean years — and we're anxiously waiting to see what the next few have in store for us.
*Name has been changed.
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