Financial Geekery

tricks of the trade: "fake" (levelized) salary

July 19, 2011

Last night I talked a lot about the key to managing your bills: automation. We had some fun going step-by-step through the process of turning your bills from a headache into very nearly a treat, and in the process, went through several tips and tricks I’ve picked up over the years, including one I call the Fake Salary. If you have a variable income, are a freelancer, or even are just paid biweekly (and thus get an extra paycheck once every six months), check it out:

 

Unless you are making so much money that you literally cannot figure out how to spend it all, variable income is a problem. Some months you’re flush with cash, and so you treat yourself, spending without a care in the world. Then some months find you on the low part of the cycle, paying for the groceries with credit card debt (which you then resolve to pay off the next time you’re rolling in dough). How do you even things out, so that you’re making steady forward progress rather than two steps forward and one step back (or two or three!)?

 

Well, you’re smart, so you’ve guessed my solution: the Fake Salary.

 

It works like this. Currently, you’re probably depositing your income into your checking account, which is all well and good. With the Fake Salary, however, you’ll deposit your income into a different account — another checking account, or even a savings account (which you can only pull from up to six times per month by federal law, but that’s okay, as we’ll only be doing it once per month). Nothing comes out of this account, except for one thing: your Fake Salary, which you’ll deposit into your normal checking account once per month, like a normal salary. This is the money you use for budgeting, paying bills, and other financial planning. The money in your deposit account — your buffer, I’ll call it — may as well not exist, except insofar as it determines what your Fake Salary is.

 

How do you calculate your Fake Salary? Well, it will be different for each person, but the idea is to take the average of your income, so as to smooth out the rough spots. So for example, if you’re paid biweekly, your Fake Salary would be (paycheck*26/12), suspiciously like what your real salary would be if you were paid monthly. If you get a quarterly bonus, add (most recent bonus/3) to your salary. And so on, and so forth.

 

With this in hand, you should have a better idea of how much money you really have to spend, and can plan accordingly. However, it’s not for everyone; some people are quite happy to live off of the money they make in poorer months, and put any extra money they get in richer months into savings. If you’re this kind of person, and think you would spend money on less valuable but more attractive things if you went to a Fake Salary, then by all means: keep on your path.

 

To others folks with variable income, however, I suggest you give the Fake Salary a whirl. Questions or thoughts? Let me have ’em in the comments section below!

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