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Managing a Variable Income: A bouquet of bank accounts

Readers have suggested that one reason underlying my occasional fits of panic over money, which usually occur when something interrupts cash flow that I had planned on and depend on to pay bills, is my habit of allocating funds to various categories. Possibly, they imply, the sea would be calmer if all income poured into a single account and I just didn’t worry about whether enough was sitting there to cover taxes, insurance bills, and the inevitable little surprises. After all, I do have a decent emergency fund—$14,500, more than I gross all year from teaching. In theory, that should cushion the various little blows that strike from time to time, and it should cover the hefty annual bills one has to pay.

It is true that I have a bad habit of overmanaging my finances. The result is that I indeed do complicate things, typically by setting up piggy-banks to hold funds designated for this or that purpose. These organizational devices grow over time into weedy Gothic structures with lots of gingerbread on the facade and secret stairways inside the walls.

One facet of this underlying problem is that I’m now living on a highly variable income. From September through May, a steady flow comes in from the community college. But I never know how much that flow will be: there’s no way of knowing how many classes I’ll be teaching until they’re assigned; in September, January, and May, classes meet only a few days, and so pay from that is predictable only in its sketchiness; and I can occasionally earn little stipends by attending training workshops or preparing an online course. Social Security, we’ve seen, has its treacherous shoals. Blog income can be anything from $100 to $300 in a month. And freelance editing is very much a catch-as-catch-can endeavor.

This, for a person who harbors a pathological desire to know that each month enough cash will reside in the bank to cover the utility bills, is nervous-making.

During the time leading up to the layoff, I mapped out a strategy for “smoothing out” income so there would always be enough (I hoped) to put food on the table and run the house. Fundamentally, the idea is to build a “pool” with a reserve deep enough to protect one from unexpected expenses or periods with no income. Out of that pool, money is allocated to pay costs that recur over longer cycles than one month. In my case, these are all annual: property tax, homeowner’s insurance, car insurance, Medigap insurance. I can’t easily pay such large bills out of pocket; the only way to ensure enough cash to cover them is to self-escrow a prorated monthly amount. The income “pool” also disburses a small monthly transfer to a savings account, which accrues enough over time to pay for things like clothing and the occasional surprise car repair or plumbing bill.

As I was figuring this out, I realized the six or eight credit union and bank accounts (not to mention the many investment accounts at Fidelity, TIAA-CREF, and Vanguard) had become unmanageably baroque. I was spending way too much time reconciling accounts and trying to figure out arithmetic and data entry errors. I decided to consolidate as many accounts as I could…that’s how, last December, I unearthed some $28,000 that had been accumulating over the years, like so much dust in the House of Usher.

So I closed all but three bank and credit union accounts, invested $14,000 in mutual funds, and kept $14,500 in the bank to serve as an emergency fund. Actually, since I did not believe I could possibly live on a gross of $29,900 (Social Security plus the $14,160 I would be limited to earning in 2010, by SS rules), I expected I would need that 14.5 grand to live on this year, and so that money became the deep underlayment of the “pool” account. It would sit there as money from various income streams piddle in to the “pool.”

The three surviving credit union accounts, then, comprised a checking account to hold the $14,500 emergency fund and month-to-month spending money, a savings account to hold a monthly set-aside for short-term emergencies and necessities such as clothing, and a money market account to hold the monthly self-escrow to cover annual property tax bills and insurance premiums. I know myself well enough to know that if I don’t put those funds where I can’t reach them casually, they will get spent long before the clothing costs or the annual bills roll in.

My financial advisers and I knew that three sections a semester, the teaching load I could reasonably expect, would put me$340 over the Medicare earned income limit, which would mean confiscation of an entire month’s Social Security check. We did not know how much Funny about Money would earn, and the amount of editorial earnings is utterly unpredictable. But we did know that every dollar earned blogging and freelancing would trigger a 50-cent penalty from Social Security; that amount, no matter how small, would be extracted in a peculiarly abusive way that is  not described in Social Security’s complicated guides. To avoid having freelance and blog income bring on even more punishment for exceeding the earnings limitation, my lawyer suggested an S-corporation, which would hold that money separate from my personal income. It would have to pay me a small salary—last year that came to $500, gross—but it could pay business-related expenses out of pretax dollars, and anything above the salary I drew out would be counted as dividends, not as “earned income.”

Because corporate income must be kept separate from personal income, of course I had to establish a business account for the S-corporation. So much for my bank account simplification program!

Still, even with that corporate account in the mix, I think my system for getting by on an unpredictable and variable income works pretty well and is relatively simple. The four credit union accounts are represented here by blue boxes:

All personal income goes into a checking account, which serves as the “pool” of funds to cover all expenses, self-escrows, and savings. The personal checking account also holds the large emergency fund, which, because it represents enough for me to live on (when combined with Social Security) for a year, I regard as money to cover living expenses during a serious illness or injury that would leave me unable to work at all.

At my age, it’s not a question of if such an event will happen; it’s a question of when. For that reason, I’m extremely reluctant to dip into the “major catastrophe” emergency fund for ordinary living expenses.

That is why I had a hissy fit over the misinformation recently dispensed by Social Security’s telephone CSRs and the subsequent confiscation of next month’s Social Security check. This fiasco will require me to use up to $1,275 of my catastrophic emergency fund. After last spring and summer’s clothing purchases and the Murphy’s Law spate that occurred when too little income was flowing into that account to cover the base expenses of utilities, insurance bills, and food, not enough remains in my personal diddle-it-away savings account to cover $1,275. Drawing dividends from the S-corporation, while it’s doable, would trigger some taxes I don’t want to pay and leave too little in that account to cover the business expenses I project for the next four to six months.

As you can see, living on freelance or nine-month teaching income is a very iffy arrangement.

If you have a large enough contingency fund…
If you earn more than enough to cover monthly bills, more times than not…
If no major catastrophes occur…
If few expensive minor headaches occur…
If no one shafts you…
If you can keep on getting work…
If you have the self-discipline to husband your money so it will last through lean times…
If you don’t have a nervous breakdown when too little comes in to cover your basic bills…

There may be other ways to manage these unknowns. The only one that occurs to me is to build a nice, deep “pool” that will always hold more than you really need to live on, and then to budget out of that enough to cover expenses. Heaven help you if you don’t have an emergency fund!

Anybody else got a better approach?

16 thoughts on “Managing a Variable Income: A bouquet of bank accounts”

  1. The Christian Science Monitor ( is predicting that, as in 2010, there will be no cost of living adjustment in 2011 Social Security benefits. Interesting, since inflation is up from -.4% in 2009 to 1.1% as of September 2010 (

    If, however, when I turn 66 in May I repay the government $21,369 for the amount of SS I’ve collected so far, I could increase the amount of my benefits to the “full” retirement figure, which would be around $1,466 — a $191/month increase. I understand that when you do that, the IRS also refunds the taxes you’ve paid; that would provide a 2011 “bonus” of about $4,985.

    If my figure of $191 a month is correct (one never knows, because I can’t count that high on my fingers), then the return on that $21,369 would be significantly higher than the amount would return if it stayed in my investments and was drawn down at the widely recommended rate of 4 percent p.a. Four percent of $21,370 is $855, or $71 a month.

  2. It does seem pretty complicated but sounds like you are acheiving your objectives. It reminds me of when I used to hide money (from myself). I would buy savings bonds or stash it away someplace as in out of sight out of mind. Then I would forget all about it and and not have it when I needed it and find it when I didn’t. Now I ask my daughter to hold it for me. Much simplier. Your implementation of a S-corp is very good. I haven’t done one yet put plan to in the future. Also will put the majority of assets in a trust at some point. As for simple, I still like to have my spending money in cash and only use a checking account for bills that need to be mailed.

  3. You may want to look into the interest you’re earning from that bouquet of bank accounts. I know a few Credit Unions are paying over 4.00% right now. Does that help?

  4. This is just a thought……but your fairly large house (for one person) with a pool, seems to use up a lot of your energy and a fair amount of your money.

    Downsizing would probably save you hundreds per month in lowered utilities, no more pool maintenance, possibly lower property taxes on a smaller home.

    As you worry about taking care of things if you hit a physical limitation, this could help in that area also.

    As I said, just a thought.

  5. @ E. Murphy: That’s definitely an idea that’s on the table! I’d like to get a nice patio home with just a little outdoor space and a pleasant interior. Problem is, in this part of the country such housing is built in areas that are zoned high-density, which means crowded, grungy, and noisy. Even those in nicer parts of town front on large main drags, with all the dirt, noise, and traffic that entails.

    My house is paid for. It was paid off before the bubble started to blossom (do bubbles blossom???). It’s now worth significantly less than what I paid for it, so I would stand to lose about $60,000 (not counting the improvements I made on it, which were not inconsiderable). Even though property values are depressed throughout the Phoenix metropolitan area, I could not buy anything comparable in an area where I want to live for the amount I could get for this house, because of its location in a buffer zone between a dangerous slum and a very upscale area. So downsizing would also mean a significant downscaling, which I don’t much relish.

    And there’s the fact that the location is awesome: a block and a half from a gorgeous park surrounded by homes that still sell in the $600,000-plus range, two blocks from the planned lightrail (which, though it may or may not get built, supposedly will offer free transportation to the city’s cultural center, such as it is), around the corner from my two best friends, on my son’s way home from work, and in THE quietest part of the neighborhood, where virtually no traffic noise can be heard.

    The desert landscaping takes care of itself, and as a practical matter, I could hire someone to take care of the pool…I just don’t want to, because just now it’s a job I can do myself with only occasional inconvenience.

    It is more house than I need!!! Two bedrooms would suit me just fine, if there were enough storage room. Houses that fit that description are a dime a dozen in Sun City, some of them quite nice. But…I don’t want to live way to heck & gone out in Sun City!

    So there are trade-offs. Right now the trade-offs are acceptable. But as you point out, over time those trade-offs will become less reasonable, and living in smaller quarters will start to look more and more attractive. 🙂

  6. I wouldn’t suggest anybody try to sell a home in this market unless they absolutely had to. Especially since it is paid off and you love it. Your age may allow you to contact the county treasurers office and you may be able to get a reduction on property taxes. If you are feeling like you have so much space maybe you would want to consider a CAREFULLY chosen boarder. Nice to know there is someone rattling around the home even if you don’t even speak to one another. And it provides another stream of income. IF it’s the right person.

    I’ve been thinking about this post over the last day. Do you have a food storage plan? That might tremendously help with piece of mind and give good assets at a discount price. My book gives a simple plan about how to start one.

    Also, have you read the book Living Trusts for Everyone by Ronald Farrington Sharp? There are ways to set up assets that provide protection but still are accessable if needed. I really learned the importance of this the hard way when my father got sick.

    It sounds like you have worked very hard to be frugal, diligent, and cautious. The concerns you mention are reasonable as none of us knows what the future will hold.

  7. I’m no financial wizard, but I don’t get when people say DON’T SELL A HOME IN THIS ECONOMIC CLIMATE. I do get that we have all lost equity. But aren’t the same people also BUYING in this economic climate? I mean if you are selling cheap you are also buying cheap.

    This does not necessarily apply to you, Funny, but I have heard several people who are extremely reluctant to sell because prices are so low now. But you don’t get to sell in a seller’s market, then wake up the next morning and buy in a buyer’s market.

    Again, this isn’t Funny’s situation, but this seems to me to be a GREAT time to buy a house.

    And for me I would rather downsize than take in a boarder any day. But then I’m a cranky old broad.

    Just my thoughts.

  8. @ E. Murphy: That’s pretty much what Realtors and mortgage officers here are saying: great time to buy, bad time to sell. The message seems to be that if you have the cash or a high enough credit score to buy an investment property, this is the time to strike. If you don’t own, this is the time to buy or rent. If you do own, this is the time to sit tight.

    😀 Darn right about downsizing before converting one’s home to a boarding house. Power to the cranky old broads!

  9. @ Carol: Not me! Thot I’d written a response but it looks like it didn’t post.

    The boarder idea is good, if you have the patience for a roommate or if the house is set up so that each party can have some privacy (for example, a split floor plan or mother-in-law quarters). M’hijito had a friend rooming with him until the friend took after M’hijito’s girlfriend, with unhappy consequences. {sigh} Another candidate for mother of my grandchildren goes by the wayside.

    It would have to be someone you could trust and who was fully compatible with you. LOL! Finding a roommate who fits that description has gotta be about as easy as finding a new spouse!

    About 18 months or two years ago, I bought an inexpensive freezer at Costco, the joy of my cheapskate life. It IS wonderful. And as a matter of fact, one thing that’s helped me to get through a summer with too little income to cover base living expenses has been the stash in the freezer: I’ve been living off that stuff for the past three months.

    My estate was set up by a very fine lawyer, though you do remind me that I need to have a chat about how we’re going to handle that upside-down house. In theory my son should have inherited enough to either pay off that house or to move into my house and sell the downtown house for a small profit. Obviously, that’s not going to work, and since my house may no longer be worth enough to pay off the principal in the downtown house, we may have to work a little pre-mortuary sleight of hand. Next week I’ll call the lawyer and make an appointment.

  10. The boarder situation is definately not for everyone.

    We have often used that alternative in our extended family. My favorite experience was a gal from Japan who was here to go to school and stayed with us for about eight months. She became very close to our family and was teaching my kids Japanese. Most often it has been among single family members.

    It does seem like the government seems to get people coming and going so it’s hard to manage and think of all the possible alternatives and once you do they change them again.

  11. You say your emergency fund is at least 1 year’s pay, which seems to me to be quite generous. I’m sure it’s nerve-wracking to wait each year to find out what your work load & income will be from your primary job.

    My husband is also one that likes to keep money segregated here & there ( & switching accounts/banks to get better interest rates or other perks); I prefer to park it in one account (actually, a checking account & savings account) & leave it, while matching my spending to our budget.

    I once worked a job with paychecks every other week (not 2 a month), which meant my annual pay was divided by 26 rather than 12 or 24. So most months of the year I had to live on slightly less than a full month’s pay, plus the pay dates get off cycle with the first of the month. I had to carefully track spending to be sure I had enough available as monthly bills came due plus be able to pay recurring things like groceries. Theoretically, the 2 additional paychecks would then be ‘extra’ money, but they always seemed to disappear the fastest.

    If I were working a 9-month job, I would take the 9-month total & divide by 12 to determine what my real ‘monthly’ income/available cash is. And on payday put the difference into a savings account, which would then be available if necessary to cover the 3 months with potentially no work. (If my employer didn’t offer the option to have my pay prorated 12 months.) I also set myself an absolute limit on variable expenses for my weaknesses like clothes & home decor per month, & am learning to delay gratification on those types of items (I’m still learning, not quite there completely yet!)

  12. Excellent strategies, Valleycat! And in fact, when you have a full-time teaching job, most employers will prorate your nine-month pay over 12 months. That’s what I elected when I was teaching at the West campus.

    Next year, when I can finally earn as much as anyone will pay me, I definitely will consider that with the adjunct pay. This year, when really was not supposed to teach more than five classes, I felt that wasn’t very practical if I was to actually live on combined income and Social Security. Pay of $2400 doesn’t go far when it’s divided by 12, especially after taxes are withheld. Prorating my net over 12 months would have given me adjunct income of $770 a month. Add that to the $975 net SS benefit and you get a total income of $1745, far from enough to cover my $2,045 base expenses.

    So I was shy of trying that…I figured I’d rather pull down savings over the summer than go hungry 12 months a year.

    Once the plan was in practice, though, I discovered that during the winter months I didn’t spend anything like $2,045, and so enough was left over to JUST cover the high expenses during the summer when no income other than SS and a $500 drawdown from the 403(b) came in.

    Knowing that, I’ve cut the drawdown to a dollar a month–the least I can take out and still remain eligible for my two remaining annual RASL payouts. With the income from the summer stipend plus this extra fall class, I should get cruise through the fall semester like Cleopatra on the Nile.

    Next summer, then, because I’ll have nine months of $500 budgeted drawdowns still sitting in the 403(b), I should be able to take enough out of savings to live comfortably through the summer. I’ve begged to be given a summer class, and as long as I don’t offend anytime between now and next May, it’s very likely the chair will kindly provide one. Net from a single summer course plus savings from the winter will carry me through June, July, and August with no problem.

    I hope. 😉

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