How to Handle Bonuses
Half of my pay is commission-based
As someone who likes predictability, that variability initially made budgeting really annoying.
I've heard “live on your salary” but then what was I supposed to do when commission actually came?
I didn’t want to SPEND all of it, but also didn’t want to SAVE all of it.
Finding that middle ground was a bit difficult to manage.
So, if you’re in a job where commissions or end of year bonuses make up a big chunk of your total pay - today is for you.
(For those with all salary, there are some good budgeting reminders, so today is also for you 🙂)
First, your salary is your home-base
Bonuses and Commissions can vary a lot.
All it takes is a bad economy for bonuses to get slashed by tens of thousands of dollars.
Treating bonuses like Upside and not Baseline is one of the best things you can do for your stress levels throughout the year.
If you decide your rent, car payment, and credit card spending on money that you don’t end up earning, you’re gonna be in a tricky spot.
So to start, make a “worst-case” budget only using your base pay.
I like budgeting in three main categories:
- Monthly Needs: Bills that are coming due no matter what
(Rent, saving, groceries, student loans, utilities, etc.)
- Monthly Wants: Things you don’t need but will likely buy every single month
(Eating Out, Gym Membership, Personal Care, Shopping, etc.)
- Random Wants: Things you won't do every month, but will at some point throughout the year, so you need to budget for it!
(Vacations, Wedding/Christmas Gifts, Concerts)
Make a budget where all of your Monthly Needs and Monthly Wants are taken care of with your salary. If you have money leftover, put some Random Wants in there too.
Well-done! No matter what the year throws at you, you’ve taken care of the basics.
Now the fun begins
You’ve got a job that pays you extra-cash - what do you want to do with it??
Since we don’t know exactly how much we’ll earn, we'll budget bonuses using percentages.
So whether it’s $10 in commission or $100,000 in commission, you know how you’ll use them.
What percentages work for me?
- 10% Tithe
- 25% Taxes (roughly)
- 35% Saving/Debt Repayment
- 30% Spending
Our save rate is higher for bonuses and that spending goes to more Random and Monthly Wants.
What you’ll quickly see is how little of your variable pay you actually end up being able to spend.
$10,000 in commission is NOT $10,000 in extra spending.
If you only save 10% and don’t give, after 25% taxes you’re only left with 65% of each dollar you earn.
This exercise may be an important wake up call for you if you tend to overspend.
For the natural savers, these percentages will hopefully help you confidently SPEND more without feeling money stress.
You’ve taken care of taxes and you’ve hit your savings goal. What’s left is yours to spend - go enjoy it!
If you have a lot of debt to pay off, there's another approach.
All of your bonus goes to your debt until a certain number is hit.
For example: The first $10,000 you earn will all go to student loans.
Then anything additional can get split up in the percentages above.
This isn’t super complicated, but it does require planning in advance.
If we don’t make a plan for our money, our money makes plans for us. And those plans are short-term, impulsive, and potentially put you in a painful spot in the future.
So if you’ve got variable income:
First, congrats. You’re likely in a high-paying field and have some awesome potential upside.
Second, do yourself a favor and do a bit of planning. It goes a long way and makes payday a LOT less stressful.
Want to set up a variable-income money system? Reach out and let’s chat!
