The Debt Adviser By Steve Bucci • Bankrate.com

Building a household budget

Dear Debt Adviser:
How can I make a household budget if my wife has a job that is straight commission and I am salary plus commission?
Bob

Dear Bob:
Thanks for an intriguing question. Actually, the process of developing a budget is the same regardless of income fluctuations. It's following the plan to make ends meet that can be more exciting for those of you with variable incomes. Your question is very timely because many people who thought they had set incomes are finding out that as a result of unemployment, their income is really variable! With that said, let's start.

A real budget consists of both income and expenses. It should balance, that is to say, all your income should be allocated to expenses. To account for everything, be sure to include savings in your budget as an expense.

Start by getting in the mood. I suggest that you and your wife begin with a discussion of your financial goals. Who says budgeting isn't sexy?! This is useful because it gives you a good reason to do the work needed to develop a budget and it orients you to what you both think is important.

Next, figure out where you spend your money. For one month you and your wife and any other family members write down every purchase or bill you pay. If you have decent records or pay most items by check, an alternative is to go back a month or two and make a list of what you spent. If you have never done this exercise it can be quite surprising. Some people find that a hobby such as sewing or photography or eating out can take up more than 15 percent of the total household budget per month!

Now you need to add up your expenses. Be sure to include any periodic financial obligations that are due quarterly or annually. There is a great Web site that the University of Rhode Island maintains that has worksheets to help you organize your expenses. As a very general guide you might use the following categories below. You will want to make sure that you include regular savings (at least 5 percent) in your plan and keep your debt expenses (no more than 15 percent) to a minimum.

Housing -- rent or mortgage, household supplies, furniture, equipment, insurance and taxes.
Utilities -- electricity, gas, heating, phone, cell phone, DSL line and cable.
Transportation -- vehicle(s) gas, oil, repair, insurance, taxes and public transportation costs.
Food -- meals, snacks and drinks at home and away from home (these can be budget breakers)
Personal -- life insurance, savings, legal and accounting fees, bank and credit card fees.
Health Care -- doctor and dentist fees, prescription and nonprescription drugs
Personal Care/Clothing -- personal hygiene products, barber and beauty services and dry cleaning
Other -- charity, religions, education and pension.

Once you have all your expenses listed, you can calculate the income portion of your budget by averaging your last year's incomes. This should give you a fairly good idea of how much you and your spouse might earn this year. Feel free to adjust upward or downward depending on how you think the year will go. Divide by 12 and use that figure as a baseline for a monthly income. Keep in mind that if your sales are extremely slow, seasonal or if there are other extenuating circumstances, you will need to take those into consideration when estimating income for the year.

Make sure that you prioritize your income to cover the most important expenses in the plan first. Given the relative importance of keeping a roof over one's head, I always suggest paying the mortgage before the cable bill. It's amazing how many people do just the opposite! You mention that you are salaried plus commission, so you might consider budgeting your salary to cover as many necessities as possible. For example, if your salary would cover the mortgage/rent payment and food, then you can make adjustments to the other categories depending on the household commission income.

How do you go about adjusting for months where your income is not what is expected or needed? The best way to avoid getting into a financial bind in a lean month is to save the gains from a better-than-average month. In other words, if you can make ends meet on $2,400 a month and you earn $3,600 one month, save the $800 difference for the month when you make only $1,900. If you have a nest egg, you can use it as a draw against future commissions to the extent you feel comfortable doing so. If you don't have a nest egg, it is important for someone like yourself, with variable income but less-variable expenses, to establish one.

I recommend that a family try to have a savings cushion of six months of living expenses. In addition to that, I recommend you open a separate savings account in a bank you don't normally go to, to deposit the money you make in commissions over and above your living expenses for the month. Don't get an ATM card for this account. The combination of the bank being out of your way and hard to get money out of, will help you accumulate that nest egg.

In addition, try not to commit yourself to a regular fixed monthly payment for something if you can avoid it. The fewer set regular monthly obligations you have, the easier it will be to cut back spending if you need to.

Hope this helps!