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My brother is a musician and works on a project basis -- the company pays him in the end of month, based on the hours he was working on each project. He is young and he doesn't make that much on a month so he needs to be careful to make it to the end of month without needing some extra money.

As he doesn't have a defined salary, it's hard for him to plan for the entire month. Some months he gets a decent amount of money, some other months just a minimum. Last night he asked me if I have any suggestion for him. Off the top of my head I told him to divide the money he gets into four and put each of them into an envelope named "Week #1", "Week #2" and so on -- he is gonna do it actually via his bank account.

So basically I told him it doesn't matter how much you have per week, just try to survive with that in that week and wait until the next week where you can spend the next division/envelop. If you got anything left in a week, save them for unexpected things that will happen in the future and try to handle every unexpected thing by your savings + the money you have for the current week. So for example if you need to pay for something that exceeds your saving, instead of spending the money you reserved for the next weeks, wait until you can pay it only by your savings or in the worst case with some money taken from your current week -- and only the current week, not the next weeks.

After I had my suggestions to him, I actually start thinking about it. My question is how practical is this approach? What are the pros and cons? Is there any good read about similar things where I can get a better understanding of such an idea? Is there any general term for such an approach, so I can get some more ideas by searching on the 'net?

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4 Answers

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I think the real problem here is dealing with the variable income. The envelope solution suggests the problem is that your brother doesn't have the discipline to avoid spending all his money immediately, but maybe that's not it. Maybe he could regulate his expenses just fine, but with such a variable income, he can't settle into a "normal" spending pattern.

Without any savings, any budget would have to be based on the worst possible income for a month. This isn't a great: it means a poor quality of life. And what do you do with the extra money in the better-than-worst months?

While it's easy to say "plan for the worst, then when it's better, save that money", that's just not going to happen. No one will want to live at their worst-case standard of living all the time. Someone would have to be a real miser to have the discipline to not use that extra money for something. You can say to save it for emergencies or unexpected events, but there's always a way to rationalize spending it. "I'm a musician, so this new guitar is a necessary business expense!" Or maybe the car is broken. Surely this is a necessary expense! But, do you buy a $1000 car or a $20000 car? There's always a way to rationalize what's necessary, but it doesn't change financial reality.

With a highly variable income, he will need some cash saved up to fill in the bad months, which is replenished in the good months. For success, you need a reasonable plan for making that happen: one that includes provisions for spending it other than "please try not to spend it".

I would suggest tracking income accurately for several months. Then you will have a real number (not a guess) of what an average month is. Then, you can budget on that. You will also have real numbers that allow you to calculate how long the bad stretches are, and thus determine how much cash reserve is necessary to make the odds of going broke in a bad period unlikely.

Having that, you can make a budget based on average income, which should have some allowance for enjoying life. Of course initially the cash reserve doesn't exist, but knowing exactly what will happen when it does provides a good motivation for building the reserve rather than spending it today. Knowing that the budget includes rules for spending the reserves reduces the incentive to cheat.

Of course, the eventual budget should also include provisions for long term savings for retirement, medical expenses, car maintenance, etc. You can do the envelope thing if that's helpful. The point here is to solve the problem of the variable income, so you can have an average income that doesn't result in a budget that delivers a soul crushing decrease in quality of living.

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Thank you Phil and all of you guys. It is really helpful to see all of the suggestions. I'm accepting this answer because of the "average income budgeting" suggestion. I think that's the most important thing mentioned here; without considering this my original idea could be so frustrating in the long-run. Thanks again Phil for sharing your thoughts! –  Mahdi Feb 14 at 17:51
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If you know, approximately, the minimum he would get in a month, his budget should be planned based on this amount. In months where he gets more than this, the excess should be put aside. In really bad months where the income drops below the expected minimum, he can use the money put aside. After a year of putting money aside, he can plan to use and budget this for any other expenses.

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Try reading about budgeting.

Make a list of all income coming in and all expenses going out. Eliminate any unnecessary expenses and try to increase income, which could include a part-time second job.

Try to always put a portion of the income away as savings - try 10%, but if this is too hard to start with try saving at least 5% of the income.

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Developing self-discipline in his spending habits is a prerequisite for dealing with a (sometimes low) variable income. While it might feel like a roller coaster ride going from boom to bust, develop steady frugal spending habits will ease a lot of that pressure.

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