How to Budget from a Lump Sum of Income

What do you do when there’s more money than month? Some people find budgeting over a whole month difficult enough – but what if your payment needs to last multiple months?


It’s not a common problem, but it does come up for students receiving loan disbursements or fellowships as well as others who have highly irregular income or who receive bonuses.


Just this last week, I received a check for $8,500 that is a fellowship payment (non-employee) in exchange for my work over 12 weeks. Before this point, I always received monthly pay, so I’ve really been thinking about how to handle lump sum income.


lump sum


The great advantage to receiving lump sum income is that you have it available to you from the beginning for whatever might come up. For example, if you need to put down a large security deposit, you have the money already and don’t have to severely restrict your cash flow in the first month of the period. You don’t have to save over multiple budgeting periods for a purchase.


The great disadvantage to receiving lump sum income is that you have a long (more than one month) period over which you must allocate that money, and predicting spending becomes more difficult the further you are looking out. Once you are out of money, you are out until the period is over, and it might be more than a few days!


Handling your cash flow involves two stages – planning and execution.


Planning Stage


1) If you have some ‘rules’ in place about how to allocate your income (what I call percentage-based budgeting), apply those right away in your plan. For example, with every dollar of income we receive right now, we tithe, save 15% into our Roth IRAs, and put aside an appropriate amount for taxes.


If you don’t have certain savings rules in place before you start, move on to estimating your expenses and then circle back to determine a reasonable savings goal. Of course, everyone should account for whatever taxes may need to be paid right off the top, which may require a calculation if withholding taxes from your lump sum is not an option.


2) You should assess what expenses you can predict for the entire pay period plus whatever transition time you might have until you expect your next portion of income to arrive (e.g. a semester plus a multi-week break).


It’s easiest to start with your regular, fixed expenses (e.g. rent, some utilities), then move to your variable/irregular but necessary expenses (e.g. some utilities, basic food, car gas and upkeep), and finally to estimate your discretionary expenses (e.g. entertainment, eating out, travel).


Obviously, if you are moving to a new area when you receive this lump sum (as I did), there is the opportunity to determine how much you will pay for some of your fixed expenses, for instance, based on a reasonable percentage of the lump sum. So you can play with the numbers in advance to determine what you can afford.


3) You should set aside a certain portion of the lump sum to account for unexpected expenses or underestimations. This amount could be lower if you have some existing short-term savings or an emergency fund and higher if you do not. Perhaps the ‘slush’ amount could be 10% of your estimated living expenses.


This step is important because of the long period over which you must predict your expenses. If you are off in your estimations, for example by underestimating your utility costs, that error will multiply over the course of the period. It is also very possible that some irregular and expected expenses will pop up that you couldn’t have predicted from the beginning. You don’t want to regret some discretionary spending you allowed yourself at the beginning of the period when you are hit with unexpected and necessary expenses later that force you to draw on your savings or carry debt. The slush fund will help with whatever might come up.


4) The last planning step is to make sure that you are living within your means during the period and to adjust your spending if not. How you compare your estimated expenses to your income will differ based on whether the income is a) (close to) 100%, b) somewhere around 50%, or c) a small portion of your total household income/regular spending over the period.


4a) The simplest situation is if your entire income is from this lump sum. Compare the lump sum income, after applying your rules and setting aside your desired slush amount, with your estimated expenses. Make sure the available money is higher than the estimated expenses! If not, reassess some of your spending to either lower your regular fixed/variable expenses or eliminate some discretionary spending.


4b) The middle ground of needing to coordinate between periodic and lump sum income is the most tricky. You still need to make sure that your total income for the period, after applying percentage based-budgeting and setting aside a slush amount, will cover your estimated expenses. You also need to check that your spending will not exceed the amount of income you have received at any time (which is unlikely unless you are use up your lump sum early on with one-time expenses). If you only need a portion of your lump sum for your living expenses, consider putting what you’re sure you won’t need toward savings or debt repayment at the beginning of the period.


4c) If your regular (non-lump sum) income can cover basically all your estimated expenses, you can try to just bank the lump sum income (after applying your percentage-based budgeting) and let it serve as some additional short-term savings or slush fund until you get through the period. In this case, the lump sum will not really affect your day-to-day budgeting and spending, but perhaps may come in handy if you have an irregular expense or want to spend a bit more. Whatever you are confident you do not need can be put toward your existing goals.


Execution Stage


While the planning stage for irregular income is important and involved, the execution stage will really make or break the process.


To apply your percentage-based budgeting principles, you have a choice between allocating the money right from the beginning and making transfers as the period goes along. For example, Kyle is really into dollar-cost averaging, so he wants to make regular contributions to our Roth IRAs throughout the 3-month period rather than one right at the beginning. However, we are setting aside the full amount for taxes at the beginning so we are prepared to make an estimated tax payment on April 15.


As you move through the period of time the lump sum is suppose to cover, it is imperative that you keep track of how your actual spending compares to your expected spending. You need to know if you are falling behind so you can tighten your belt somewhat. In the opposite case that you overestimated your spending, you could add some additional discretionary spending.


Where you keep your lump sum income will depend on your personality. You do have the option of keeping it all in checking and drawing it down through the period. This may help you in tracking your spending precisely, but you can’t let yourself feel like you have excess money when you see the high balance near the beginning of he period. Another option is to put the lump sum in savings and pay yourself from savings to checking at regular intervals to help keep your discretionary spending in check. If you have a combination of regular and lump sum income, the latter approach may help the lump sum conform to your regular budgeting method.


If you are forcing your lump sum income to behave like regular income, for instance by drawing it periodically from savings, it is possible that typical monthly budgeting software like Mint will work well for you. Any budgeting software that turns over with every month will be difficult to work with if you have lump sum income that you are simply drawing down as the period progresses. In that case, I would manually track my spending against my estimated expenses, probably by building a nice Excel spreadsheet.


I have to admit I am finding dealing with a lump sum income more difficult than I anticipated, but that might have more to do with the fact that I moved and have different expenses now as well as a different kind of pay. More on my personal struggle with our money in the last few weeks in my next post!


Have you ever had lump sum income that you needed for your living expenses? Do you know of any additional strategies for those trying to budget with lump sum income? If you had lump sum income, would you try budget from the entire sum or monthly/bi-weekly as with typical income?


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22 Responses to "How to Budget from a Lump Sum of Income"

  1. When I was self-employed, I had a pretty variable income. Sometimes I’d rake it in and other months I would get next to nothing.

    The trick for me was building a big safety buffer then just not caring how much money I had sitting around. I had my budget, I knew what I could spend, and I spent that regardless of how much cash I had.
    Emily @ Simple Cheap Mom recently posted..Cutting Difficult Expenses: I’ll Miss You Data Plan

    1. Emily says:

      For irregular income ITA that a big buffer gives stability and peace of mind. I haven’t had to depend on irregular income but if I did I’m sure I would try to have a buffer and pay myself a salary.

  2. My entire working life has been a stream of irregular income so having systems in place (in my case, percentage budgeting) is an absolute must for me.
    Stefanie @ The Broke and Beautiful Life recently posted..Financial Planning on the Assumption of Staying Single

    1. Emily says:

      I’m sure there is some projection of expenses and income that comes from having only irregular income to depend on, similar to what I discussed here. With my contract job, there is a pretty sizeable delay from when I earn the money to when I receive it, so there is time to adjust workload and spending.

  3. That sounds about right. Another thing we did back in grad school when the cd rates were higher was to divvy up the fellowship and put it into CDs that came due and spit back into our bank account about the time we predicted we would need the money.

    Though in grad school it was a little bit “easier” because we had so little money the answer to, “can we afford this little luxury” was generally no unless we’d earned extra through being experimental subjects or extra RA work.

    Going on sabbatical was more fun but a little bit more challenging because we could afford luxuries and had a much larger lump in savings to spend down. It’s really important to get those fixed expenses down. Mostly I would keep a running tally every month on how much was in checking/savings vs. how much I thought we would still need at that point. Still, given my personality we probably underspent compared to what we had initially budgeted and ended up making a big lump sum into the mortgage when we got back. I’m not sure what will happen next year as we have less saved up and housing prices are higher than they were last time we did this. But I can already feel my self going, “no, we don’t need to eat out” and yesterday when my daughter shattered the ipad screen I got all depressed (DH offered to replace it with his allowance… not sure if I will take him up on that or not).
    nicoleandmaggie recently posted..February Mortgage Update: Moving Money Around

    1. Emily says:

      Yes, things are a bit easier when you basically have to assume you can’t afford any luxuries. I’m trying to adopt a spend-only-what’s-reasonably-necessary attitude right will be interesting in a few years when we are closer to your current situation.

  4. Fiby says:

    I do have two lump sum fellowship payments a year (it’s a supplemental fellowship of $5500/yr). But actually, I have had the opposite problem – I have to make lump sum payments! Living in on campus housing means I have to pay my rent three times a year (fall, spring, summer). So I have to set aside money for these lump sum payments (which in fall and spring, are somewhat mitigated by the lump sum fellowship payments).

    I do believe that GRAs and GTAs at my school are allowed to pay the school fees (and I think housing counts too) via payroll deduction – but only for the GRAs and GTAs that are salaried! I’m paid hourly, so I can’t do this (GRAs that work at the pseudo independent research arm of my school are paid hourly, whereas GRAs that work directly on campus are salaried). I understand why they do this though – for hourly based paychecks, there’s no guarantee that I will work the standard 20 hours a week, so they may not be able to deduct it correctly on a regular basis.

    It’s not a problem for me, because I built up a decent stash the summer before grad school, but I’d imagine this may be problematic for some.

    1. Emily says:

      That lump sum for housing really sucks! But I guess once you save it up the first time you should be good for the rest of them. It’s weird that there are so many different scenarios at your university/institution wrt pay and housing and so forth. Looks like you’re in the unlucky configuration, but thankfully you were prepared.

  5. Fiby says:

    Yea it is unusual. But it all stems from the fact that my lab is in the pseudo independent research arm which has a different paycheck processing system (at least, I think).

    By the way, I think a while back you had asked if I would be interested in writing a guest post about on vs off campus housing for grad school? Now that I’ve got my blog going, I think I’d like to write one, if you’re still interested.

    1. Emily says:

      Very interested. Sent it over!

      1. Fiby says:

        Cool beans. I’m pretty busy this week but I should have it next week sometime

  6. Brooke says:

    We had lump sums from my grad loans when I was in school. I have to admit the first semester we ran out of money : (. Not enough income, professional expenses, new city with high cost of living etc. But then that scared the bejeezus out of me and we have been on a steady track of being better and better with our money, so I guess it was worth it!
    Brooke recently posted..Do What You Want With Your Life Sooner Rather Than Later: New Road Maps for Quitting the Rat Race

    1. Emily says:

      Is not so bad to be scared straight early on. And I can easily see how someone inexperienced or just unprepared for a new city can mess up with a lump sum. What happened when you ran out of money – credit cards?

  7. Hi Emily, great article on lump sum income. I have a question: How would you take a tax-free cash lump sum from your pension?
    Jayson @ Monster Piggy Bank recently posted..What to Do When You’ve Had Enough of Work?

    1. Emily says:

      I have no idea!

  8. Oooooh, good question.

    1) I am NOTTTTT a tax professional, but I am nearly certain that you don’t have to set aside enough for FICA taxes as well. As a fellowship, it ought to be subject to those rules, so you only need to set aside enough for income taxes (federal and state). Of course you should probably set aside a little more than you think you need, for safety’s sake, but still. Another thing that might make the tax situation easier: would you consider opening a traditional IRA for this year? If you stash $5500 in there, that significantly changes the tax situation at the cost, of course, of paying taxes later.

    2) As for handling it, I would say that it is different from irregular income because it’s highly predictable. It’s more like a larger-scale version of the problem of being paid monthly or bi-weekly and needing to stretch X dollars over Y time. I’d start by subtracting one-time fixed costs (eg a plane ticket to get me to the fellowship location) and then take what is left and divide it by the amount of time I need it to cover, and then you know how much you can spend per month, just like with a regular salary. If you’re worried about keeping track, the transfer from savings to checking at the beginning of the month is a good idea.
    C@thesingledollar recently posted..Zero Food Waste 2015, Week 3: Sharing

    1. Emily says:

      1) I’m pretty sure I only owe income tax on the fellowship income. I’m not certain enough in my research to post about it, but I’m not planning to pay either side of the FICA tax for this income. It’s not definitive but it’s enough for me to go on personally. I actually know pretty much exactly what I’ll need to pay in income tax because it’s just our marginal federal and state tax brackets. Kyle’s income will fill up the lower brackets on its own, and mine isn’t enough to kick us up to the next bracket. If we’re off, it won’t be by much. We’re still in the 15% bracket so we want to stick with the Roth IRAs.

      2) I agree that lump sum income – of a known amount, as you said – is different from irregular. But irregular is more common so it’s worth talking about here as well. Also I still have irregular income! Yes, I agree about accounting for what you know you will spend and then allocating the discretionary income. You could even do it week by week over the period instead of month by month, which would be easier for things like food and entertainment.

  9. P.S. this might be a large enough sum of money that you should consider paying estimated quarterly taxes to avoid penalties next year.
    C@thesingledollar recently posted..Zero Food Waste 2015, Week 3: Sharing

    1. Emily says:

      Yes, I am planning to pay estimated tax on April 15.

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  12. […] option of withholding and self-employed individuals. I just finished a 12-week fellowship for which I received a fixed amount of pay in January. I freelanced a bit while I was doing the fellowship and plan to ramp that up now that I’m done. […]

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