How to budget when your income is all bonus?

[Anonymous]

Anonymous wrote: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.

OP here, how much is your slush fund? Do you not feel like you would have a much better quality of life if you are able to use more than 20% is your earnings?

[Anonymous]

Anonymous wrote:
OP here, how much is your slush fund? Do you not feel like you would have a much better quality of life if you are able to use more than 20% is your earnings?

Our aggregate HHI is about $6mm (not including return on investments, which just get immediately reinvested) so we live on about $1mm (gross) and save the rest. We generally set aside about $250k for our slush fund.

I see your point about lifestyle - the difference between a $1mm and $6mm lifestyle isn’t too life changing, but $350k to $1mm can be. At your income, I would probably try to save $150k from each bonus to live off of the next year, then save the rest.

[Anonymous]

Anonymous wrote: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.

What kind of work does he do??

[Anonymous]

We take the bonus, consult with our accountant and set aside income taxes in a separate account. Then we look at the cominf year's needs and allocate accordingly. Thus we are only spending money we have already received.

[Anonymous]

I use YNAB and they have guidance for dealing with variable income. I agree with the PP about only spending money you already received so use the bonus to fund the current year etc. you could decide how much you want to save for an “emergency” if you make much less the next year, etc.

To some extent you could also decide if you want to fund some things with the bonus instead of part of the your regular monthly budget, and if you get less, you spend less on these things for that particular year: retirement savings in a lump sum for the year with bonus money, college savings for eventual kids in a lump sum with bonus money, travel money for the upcoming year in a lump sum with bonus money etc.

This is a little bit above my knowledge base but I would also think you could put some of your money to work earning money and use the interest for living expenses.

[Anonymous]

Anonymous wrote: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.

You should be living on $350k (meaning, saving 20% of that like it's your only income) and saving 100% of your bonus for the next 2-3 years to build up a nest egg and savings for a down payment to buy a house. If you figure out a way to smooth your income to adjust to "a reasonable lifestyle at 1M" before you even have a house or kids, you'll feel poor forever for no reason because you'll be adding in expenses that will cut into what you thought was "reasonable" and it will pinch. Live cheap, build a base, and then coast.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

You should be living on $350k (meaning, saving 20% of that like it's your only income) and saving 100% of your bonus for the next 2-3 years to build up a nest egg and savings for a down payment to buy a house. If you figure out a way to smooth your income to adjust to "a reasonable lifestyle at 1M" before you even have a house or kids, you'll feel poor forever for no reason because you'll be adding in expenses that will cut into what you thought was "reasonable" and it will pinch. Live cheap, build a base, and then coast.

I am also in this camp. You're setting yourself up for stress/failure if you try to live like you make $1M. Live cheaply for the next few years and save those bonuses. Buy down your mortgage to what is reasonably within that $350k salary (by putting down a larger amount of the purchase price). Two people living on $350k is still an amazing lifestyle. Make sure you are both fully funding tax-advantaged savings.

Have a kid, and keep saving. First for college/retirement, then for another larger house. Or private school. Amazing vacations with your kids.

[Anonymous]

Our numbers are very similar to OP.

We maintain a fairly middle class lifestyle by living off salaries for day to day expenses. We don’t scrimp or budget, but we are mindful to spend less each month than our take home pay. Our housing costs are low due to good timing in a recent refinance, but we also live in an extremely middle class neighborhood. We are happy here.

However, we don’t save (other than 401k withdrawals) from the salary funds. As bonuses and stock vests come in each quarter, we use those funds for the things that move our life from middle class to wealthy. That includes tax prepayments, large charitable donations, a healthy vacation fund, and private school tuition. Every few years we might buy a car or do a big house project. We invest the remaining funds, which is ultimately way more than we spend.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

You should be living on $350k (meaning, saving 20% of that like it's your only income) and saving 100% of your bonus for the next 2-3 years to build up a nest egg and savings for a down payment to buy a house. If you figure out a way to smooth your income to adjust to "a reasonable lifestyle at 1M" before you even have a house or kids, you'll feel poor forever for no reason because you'll be adding in expenses that will cut into what you thought was "reasonable" and it will pinch. Live cheap, build a base, and then coast.

Agreed. You should absolutely be plowing maximum savings into 529 plans, retirement savings, brokerage accounts, etc…. and living on a modest 350K budget. I would only use the bonus to cover one-time expenses like paying cash for a new car every 5-10 years in lieu of a recurring car payment, vacations, and home improvements.

[Anonymous]

If you currently have low obligations, your lives will be *a lot* better if you save as much as possible now, ie live off your $350k for several years and create a cushion from what you can increase your yearly income and also be ahead on retirement as much as possible.

We have done this and then annual income is actually enough to live on from investments and bonuses are useful to increase the principal from which we live.

A few years of saving $600k+ (even if half goesl to a place where you will use the proceeds, the other half perhaps to retirement etc that is less liquid) should allow you to increase your "base" income by $100-$200k / year and so you can live with kids comfortably and have a stable income. Think of it how retirees live - they live off the proceeds of their considerable savings.

[Anonymous]

Anonymous wrote:Our numbers are very similar to OP.

We maintain a fairly middle class lifestyle by living off salaries for day to day expenses. We don’t scrimp or budget, but we are mindful to spend less each month than our take home pay. Our housing costs are low due to good timing in a recent refinance, but we also live in an extremely middle class neighborhood. We are happy here.

However, we don’t save (other than 401k withdrawals) from the salary funds. As bonuses and stock vests come in each quarter, we use those funds for the things that move our life from middle class to wealthy. That includes tax prepayments, large charitable donations, a healthy vacation fund, and private school tuition. Every few years we might buy a car or do a big house project. We invest the remaining funds, which is ultimately way more than we spend.

Do you find paying for private school, rather than moving to a place with a good public school system, to be better?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Our numbers are very similar to OP.

We maintain a fairly middle class lifestyle by living off salaries for day to day expenses. We don’t scrimp or budget, but we are mindful to spend less each month than our take home pay. Our housing costs are low due to good timing in a recent refinance, but we also live in an extremely middle class neighborhood. We are happy here.

However, we don’t save (other than 401k withdrawals) from the salary funds. As bonuses and stock vests come in each quarter, we use those funds for the things that move our life from middle class to wealthy. That includes tax prepayments, large charitable donations, a healthy vacation fund, and private school tuition. Every few years we might buy a car or do a big house project. We invest the remaining funds, which is ultimately way more than we spend.

Do you find paying for private school, rather than moving to a place with a good public school system, to be better?

Totally fair question. From a financial standpoint, moving probably would have been smarter if we were only doing it to be at a “better” school. However, we didn’t hit this income until the kids were already in school and we had an established community. Switching to private wasn’t driven by the higher income. Instead, our kids needed something specific they could not get at any public school.

If I was a DINK making this income, I’d still focus on living well below my means so that even when kids/a mortgage/maybe tuition are in the picture, you can live off the salary. Things change and you will appreciate the flexibility. DH (who brings in about 80% of our income) has grown to really dislike his work, but the tuition means he is locked in until the kids finish high school. He plans to retire the moment both kids are launched, around age 50. Our low cost of living means that’s a real option.

[Anonymous]

So, first, if salary is $350k and bonus $650k, that is nowhere near 80+% of total comp (it’s 65%).

That’s a high bonus %, but probably not incredibly high. I’m guessing tech sales.

For us, my salary is $220k and this year’s bonus was $250k. DH is a fed with $200k salary but no bonus.

One strategy is to live on salary and save the bonus.

Another is to invest the bonus, and then either supplement salary during the year with passive income from that investment (like dividends that are spent rather than reinvested), or sell some of the investment during the year. We have done this in some past years. I prefer the dividend strategy because the principal isn’t being touched, but the growth stock strategy can work too.

Finally, you have a hybrid strategy where you live on salary throughout the year, but invest the bonus, and then sell investments only for large purchases (vacations, cars, home renovations, tuition). This is what we do now (but we cash flow vacations).

We have 3 kids, a nanny, and like to vacation internationally (so plenty of expenses). Fortunately, on top of the HHI above we get good profit sharing, 401k matches, and a FERS pension. Total NW at 43 is about $2M in retirement, $1M in taxable accounts, and $500k home equity. But our general annual spending is within 20% of your salary alone.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

What kind of work does he do??

This is common in investment banking…many MDs get a base salary of $300kish but can earn millions in annual bonuses or very little depending on the group.

I guess the difference is that absent a 2008 Lehman event…you know if your group has been closing deals and you can guess your bonus in advance.

You still wait for the actual bonus to hit the account…but you can start planning.

[Anonymous]

DH is very bonus heavy. He gets a multi million dollar bonus. We live off the base meaning we could live on just his regular everyday paycheck.

Bonus covers extras like vacations, cars and luxuries that we don’t have to have. We have had many years of bonuses that we saved.

DH has colleagues who depend on their bonus for private school tuition, monthly expenses, etc. their monthly burn rate seems higher than ours.