How to Budget When You Rely on Cash Tips

If you work in the service industry, the majority of your income likely comes from tips — and that can present difficulty when trying to budget your money responsibly. But just because it's not easy doesn't mean it's impossible. You can keep your cash flow in check if you have the right tools and systems in place.

Track every dollar you make

The first step to getting on track financially — even when your tips fluctuate from shift to shift — is to account for all of the cash you make over a period of time. You won't get a good idea of what to expect from month to month from just a couple weeks' worth of income, so it's best to monitor your tips over an extended period, ideally two to three months. This sampling should provide a decent basis on what you can expect to average throughout the year given that your place of employment is relatively consistent in terms of traffic. It may be a better idea to sample a slow period so you have a real bottom line as opposed to an inflated sense of income during a rush like the holidays.

Natasha Rachel Smith, personal finance expert at, offers a suggestion to put this plan in place.

"Write down how much you make in a journal or spreadsheet after every shift for 10 weeks to get an idea of your average weekly income," she says. "Although that amount will fluctuate depending on the economy, low or high seasons, and service quality, by averaging 10 weeks' worth of pay you can get a fairly reasonable and realistic idea of your typical earnings."

Create (and stick to) a budget based on goals

Once you have an idea of how much you can expect to bring home on average per month, it's time to budget your income so all your bills are paid on time — and so you're not stressed out and trying to scrounge up cash for a car payment at the last minute. To do this effectively, says finance expert Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, create a budget based on goals.

"Whether your goal is to save on weekly grocery bills, have time to train for a marathon, save for retirement, or take a vacation to China, write down the goals and build your budget with the goals in mind."

In the budget, be sure to include a line item for savings in the "expenses" area, and treat it as a mandatory item to be paid. But, it can also be a variable expense — establish a percentage of your take-home pay that you'd like to put toward your goal after every shift.

"Ten percent or more is ideal," Gallegos says, "but if it's less than that, choose the number and stick to it."

Start a system for envelope budgeting

An easy way to delegate your funds to the bills you need to pay — especially if you don't want to make daily deposits to your checking account (which I don't recommend anyway because the only agency who will benefit from that paper trail is the IRS) — is to start a system of envelope budgeting. With this system, you add the regular cash you earn to envelopes designated for specific expenses, like rent, groceries, and student loans. By divvying up your cash after each shift, you can see in real-time how much you've saved and how much you still need to contribute to cover your general life expenses. This is also a good way to cut back on your "extra" expenses because live tracking will keep you informed on whether you can spare the money or not.

Separate your singles if you can afford it

If you can afford it, and provided you aren't only paid in this denomination, tuck away all one-dollar bills into a jar or container instead of spending them.

"Dollar bills will accumulate faster than change and it will give you a jar-fund to use when low on money or for the small, fun things in life," Smith says.

Look for patterns to keep your finances balanced

After a while, you'll be able to observe patterns in your income — a slump during the winter months or an uptick around a holiday, for instance — as well as determine a typical monthly minimum income level. By minding these patterns and building your budget around them, your finances should stay fairly balanced throughout the year so you're not stuck in the lurch because you were naive to expectation.

Gallegos suggests holding on to receipts and keeping a spending log.

"Many people find it eye-opening to see how much they spend each day," he says. "It's very similar to writing down everything you eat when trying to lose weight. Review carefully on a weekly basis to spot areas where you can cut back, and to become more familiar with your spending patterns."

Establish a "floating fund"

Another idea of Gallegos' that you may not have heard is the "floating fund," which establishes an absolute baseline of sufficient savings to cover expenses such as quarterly estimated self-employment taxes and an emergency fund.

"Common wisdom suggests keeping six to nine months' living expenses in an emergency fund at all times," he explains. "This fund then can also serve as a 'floating' fund to pull from during leaner times, for replenishment as income increases. It's key to think of the funds in this way — not just to pull from, but to replenish."

You will need to train yourself to pull from — and replenish (the hard part!) — these funds on a regular basis to make this work.

Send financial windfalls directly to savings

When you earn or receive extra money — from a large event you work, a gift, or even a yard sale that you host — get in the habit of saving rather than spending that extra money. If you make this standard protocol whenever you come into unexpected cash, your savings will increase quicker.

Don't make any major financial commitments

The last thing you want to do if your income fluctuates is overextend yourself unnecessarily. Business can decline unexpectedly or you could lose your job altogether. These unfortunate circumstances can put you in a precarious predicament financially — perhaps even driving you into a deep debt situation that could impair your life for many years into the future.

"Stay away from accruing debts or taking out loans if you're living on a tip-based income," Smith advises. "This is because your earnings are unpredictable and you could find one bad week creates a financial avalanche, simply because you didn't make enough money to cover a car payment or a credit card's minimum repayment."

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