How to deal plan a budget with extremely variable income?

Question

I am a full time master's student. My income comes exclusively in the form of irregular scholarships and grants, both in terms of time and amount. I have no regular income.

For example, I might get 10k$ in January and then nothing for 8 months, then 2k$ twice in a month, 5k$ three months later, etc.

While I don't really have a way to predict what my income will be in the medium to long term, I do know that on average I make enough money to sustain myself.

What is the best way to plan around the variability of my income?

Answer 1

It sounds like your income is completely random so you need to build up savings. Simply living on what you make will eventually cause you to fall victim to gambler's ruin. (Your random income is a form of gambling. You're obviously doing something with a random payoff even though only time is wagered.)

Thus you need to live below what you can afford to build up a substantial reserve. This will also give you time to get a better picture on what your income averages out to.

Answer 2

Your budget is basically a plan for how you spend your money. You need some idea of how much money you have (and will have) before you can come up with a useful plan for it. Til then, all you can do is avoid buying anything you don't absolutely need and hope the money lasts.

Answer 3

Age your money. It basically means 'save it for later'. Budget & spend money using your previous income. In my case, I got paid monthly so 1 month age is sufficient. So when I get my paycheck, I budget it for the next month. 'Paycheck to paycheck' can be solved in this way.

According to your income description, age your income for several months(maybe 6 to 12 months). This means you need to save money that worths 6 to 12 months budget. It is quite inefficient since you will have a lot of cash uninvested. Except for short-term investments like MMF, I think there is nothing much to deal with it.

Save for the rainy day. As much as your income, some of your expenses(such as medical bills, car repairs, etc) cannot be predicted. But you still know that you will gonna pay it someday. Budget it with your best guess.

Additionally, it is advisable to save your 3 to 6 months expense as an emergency fund. You don't budget this for any use. Use it when you don't have money to budget. It is also useful to defend your investments. You don't need to sell investments at a low price.

Roll with the punches. Be flexible with your budget. If you overspent on groceries, don't use your emergency fund just for that. Simply reallocate your budget. If your recreational budget is underspent, move some of the money to the groceries budget.

Disclaimer: Most of these ideas are from YNAB. I'm a user of YNAB.

Answer 4

While I don't really have a way to predict what my income will be in the medium to long term, I do know that on average I make enough money to sustain myself.

In addition, to calculate with the income side of a budget, you'd need to have some idea about the range of variation.

Consider: earning on average a million per year will not be sufficient if it takes the form of 99 years 0 followed by 1 year of 100 million.

The idea could then be to establish the amount of savings you need to weather out, say, 95 % or 99 % or all (as the master is a predictable duration) of the "dry" periods.
Thus, the amount of savings you have already is crucial: if you had enough savings to last for your studies, you wouldn't need to be concerned about the variation as long as the average is OK.

Unfortunately (or fortunately?), your masters' studies are probably not going to be long enough to get a useful estimate of that variance (probably not even in hindsight).

So you'll need to use practical heuristics,

• as others have already pointed out, your only possibility is to start extremely frugally. Take account of your expenses and sort/classify them according to urgency/necessity.

• At the beginning, you need to save very aggressively, as savings allow you to weather out variance in the grants which presumably you won't be able to influence.

• You can consider relaxing this a bit once it is clear that you have a sensible buffer. But do consider how sure you can be to find a job immediately after graduation, and whether it would be better to go on accumulating so that you do have a decent chance to get a job before you run out of funds.

• However, considering that a master is 2 - 3 years and your example contains a dry period of 8 months, I guess the sensible buffer would boild down to: try to save up enough to last you till the end of your studies.

• Do make a plan B: Considering the really necessary expenses, find a lower limit of your savings that triggers looking for some other income (side job). Maybe a warning level that makes you look out for opportunities in this direction - or anyways keep an eye on opportunities.
  In addition it may be useful to specify limits below which your budgeting becomes more aggressive, and you stop group C (B) expenses.

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Disclaimer: cultural aspects will influence possibilities and ways here. I come from a country where student loans are not so typical (with the exception of governmental help for poor students, part of which is a 0 % loan). And students working a side job is rather the norm, whereas erratic/random scholarships and grants as you describe are basically unknown (in contrast to single or few-month TA contracts).

Answer 5

Be frugal and save. I don't think there's a specific trick to this.

Specifically, you'll just want to stay away from volatile assets. There's no point to chasing yield if you don't know when your next check will come because you don't want to get stuck drawing down principle after a loss. So you'll be looking at money market, savings, cds, and short term bonds.