How to budget when your income is all bonus?

[Anonymous]

Our income primarily comes from DH's once a year bonus (80%+). It's hard to predict what the amount would be every year and of course the annual bonus is not a sure thing.

How would you budget in this circumstance? Is it just a matter of having an emergency fund of more than 12 months of living expenses?

[Anonymous]

This feels very precarious. I would get a stable job so the pressure isn't all on DH. Or I would have DH move jobs.

[Anonymous]

You try to live off of your salary plus his base salary. His bonus can be used to pay down long term debt, for one time purchases, and to bolster saving

[Anonymous]

That's a challenge, but ignore the person who said have him change jobs. You can do this. We need more info to help you. What's the salary and what's the range of bonus? Is there a minimum bonus you can reasonably expect?

My initial thoughts are to try and get ahead of your money so that you can use your year-end bonus to smooth out your cashflow in the following year. For example, if you get a $150,000 net bonus in December, I'd say to save $30k of it for your future, and then plan to fund your life the following year with $10k/month. You can do this by setting up a separate account and having $10k/mo transfer automatically to your checking account.

I don't think it's just about having a year's worth of living expenses saved, although that's a great idea. But you want to have a level of ease and comfort in knowing you can spend x$/month rather than starving for eleven months on his salary and then getting relief in December.

[Anonymous]

It depends on how much your overall HHI is and what a reasonable and acceptable household run rate is to you and your DH. But you’ll want to carry a much bigger emergency fund than you would otherwise. Also, base your annual budget off of a conservative estimate of DH’s income (say, 78-80% of previous year), and pretend in your mind that that’s the total from which you need to figure out your savings goals, discretionary spending, etc.

[Anonymous]

Anonymous wrote:It depends on how much your overall HHI is and what a reasonable and acceptable household run rate is to you and your DH. But you’ll want to carry a much bigger emergency fund than you would otherwise. Also, base your annual budget off of a conservative estimate of DH’s income (say, 78-80% of previous year), and pretend in your mind that that’s the total from which you need to figure out your savings goals, discretionary spending, etc.

+1 OP you have the right idea that you need to save enough so the bonus is funding the following year. Most people need a minimum 12 months savings emergency fund in case of job loss. In your case, I'd try to save and get to 24 months emergency fund.

Also, live below your means until you have a solid retirement saved. That's good advice for anyone, but essential if most of your HHI is unpredictable.

[Anonymous]

Anonymous wrote:You try to live off of your salary plus his base salary. His bonus can be used to pay down long term debt, for one time purchases, and to bolster saving

+1. We kept our expenses down and ended up in a great financial place 15 years later.

[Anonymous]

We are in the same situation - DH’s bonus is 80-85% of our annual income. We handle it by living off of our monthly paychecks, although we do exhaust almost 100% of our monthly income each month. When the bonus comes in, we look at our expected expenses for the upcoming year and pull out however much we think we might need as a cushion, then invest the rest. That will provide us with a cash slush fund just in case any unexpected expense comes up or we have a particularly expensive month. The trick is to not preemptively spend the money, because that can cause you to fall into debt if the bonus isn’t as big as you hoped. Live on the 20%, and use the bonus to provide an emergency fund, fund any large unusual expenses (e.g., one year we used the bonus for a house down payment), or for savings and investments.

[Anonymous]

Anonymous wrote:Our income primarily comes from DH's once a year bonus (80%+). It's hard to predict what the amount would be every year and of course the annual bonus is not a sure thing.

How would you budget in this circumstance? Is it just a matter of having an emergency fund of more than 12 months of living expenses?

For how many years has he had this job?

Call his base 1.00

What is the min, max, max, median (middle), and mean (total/years) of the bonuses over those years?

[Anonymous]

Anonymous wrote:Our income primarily comes from DH's once a year bonus (80%+). It's hard to predict what the amount would be every year and of course the annual bonus is not a sure thing.

How would you budget in this circumstance? Is it just a matter of having an emergency fund of more than 12 months of living expenses?

Having a job outside of government is never a sure thing. 0% bonus is almost the same as a non-bonus person getting laid off. Consider the bonus as normal pay, and save for the future because any job can disappear or get defunded.

[Anonymous]

I think it depends on how much you make.

My sister is like this but her DH has a base salary so they basically live on his salary and then pay things off/save from their bonuses. My sister is 100% commission based. So for the first 3/4 of last year she made $200,000, which is very low for her. Her DH has a base salary of like $400,000 and then has commission if he makes his number. I think he got a $300,000 bonus or something last year because he made 100% of his quota. My sister made $500,000 in the last 2 months of the year.

I have zero idea how you budget this since it changes every year but they have a VERY high HHI so they make it work.

[Anonymous]

Anonymous wrote:I think it depends on how much you make.

My sister is like this but her DH has a base salary so they basically live on his salary and then pay things off/save from their bonuses. My sister is 100% commission based. So for the first 3/4 of last year she made $200,000, which is very low for her. Her DH has a base salary of like $400,000 and then has commission if he makes his number. I think he got a $300,000 bonus or something last year because he made 100% of his quota. My sister made $500,000 in the last 2 months of the year.

I have zero idea how you budget this since it changes every year but they have a VERY high HHI so they make it work.

PP here - I will add my DH also gets large bonuses and quarterly distributions but he has a base salary as well. I just have a regular job. So I make $145,000 a year in regular paychecks, DH makes $350,000 a year in regular pay checks and then gets around $100,000 distributed throughout the year. Then at the end of the year he gets a $100,000 bonus. So I just budget based on our regular paychecks.

[Anonymous]

We need to know your base household income, without the bonus. Is it enough to live on? Because as PP just explained, sometimes the base salary is a decent middle class income, and the bonus puts you in wealthy territory! In which case, you don't actually have a problem, you just need to manage the cashflow.

[Anonymous]

We have a similar first world “problem”. Not really. HHI is normally $3M+. My DH makes $300k base and has made $1M+ bonus. My base is about $500K with a $1-2M bonus in a good year. We have relatively low expenses and just live off the base salaries. We plan to retire next year at 41 and 43 yo and travel the world with our kids on our 50 ft catamaran. Kids will be homeschooled.

[Anonymous]

OP here - thanks for everyone's replies! I knew there would be people on DCUM with a similar experience and wisdom to offer.

Our HHI is about 1M with bonus but about 350K without bonus, so it indeed is a cash flow problem. As you can imagine, a reasonable lifestyle at 350K is very different than a reasonable lifestyle at 1M. We want to optimize our lifestyle without feeling like we're "starving" throughout the year until bonus month comes. Or worse, spending away and there is no bonus month.

The expectation is that the HHI will grow a bit more before plateauing. Maybe 50% more. I work as well but I contribute very little to the overall HHI.

Currently, we are DINKS can definitely live on the 350K. However, we are planning to have children in the near future and will need to buy a house in this market, which will drastically increase our fixed costs and likely put us over the 350K mark. While we could save more of the bonus now to offset any worries, we are concerned that we would be wasting our "prime" DINK years so we're trying to see if any other solution is viable.