How to build your financial future while working for tips
Saving money is challenging for almost everyone in today’s world. According to one personal finance survey conducted late last year, 62 percent of Americans have less than $1,000 in their savings accounts. Twenty-one percent don’t have savings accounts at all. It’s particularly difficult to pay down debts, stash emergency cash and prepare for eventual retirement when you work for lower wages—and even more so when a substantial amount of those wages are comprised of tips.
If you thought that restaurant employment was going to yields stacks of crisp green bills with every shift, you’ve probably since discovered that getting rich on tips is one of the industry’s biggest myths. One report, which studied two years of earnings from 15,000 restaurant workers, found that waiters, waitresses, bartenders and bussers earn an average base wage of $9.90 an hour plus $3.40 per hour in tips. That’s an average income of $13.30 per hour, 25 percent of which is tips.
This isn’t to say you can’t earn more—or even less—at your place of employment. Your actual wages depend on the base pay offered by your restaurant and the generosity of the customers you serve—two factors heavily influenced by your location. The aforementioned study found waiters and waitresses in San Francisco earned much more than the average in hourly tips ($11.90) and close to the average base pay ($9.60), while those in Denver earned a lower than average base pay ($7.60) and $9.70 an hour in tips.
How are you supposed to build towards a healthy financial future while working for limited (and frequently variable) pay? The same basic methods apply, regardless of your position within the hospitality industry.
Open a checking and savings account
If you do not yet have bank accounts for stashing your cash, you need to open one for spending and one for saving as soon as possible. It’s too easy to lose track of where your tips are going and often difficult to pay bills with paper money. Bank accounts, complete with online banking features such as automated bill pay and budgeting tools, will help you to account for the money you have coming in and going out.
Start tracking your earnings
As you know, tips are variable. This can make it difficult to determine how much you bring in on a regular basis. So get a notebook and start recording the tips you earn for every shift worked. Do this for a minimum of two months. You can then add your average tips earned per month to your paycheck average per month to get an estimate of your total average monthly earnings.
Keep a careful record of your spending
Deposit your cash tips as soon as possible and your paycheck every payday. Whenever you can, use the debit card attached to your checking account for purchases. If you have access to online banking, you can easily track these debit expenditures and determine exactly where your earnings are going each month.
Create a budget that allows for paying down debt and saving
This can be understandably tough when you’re living paycheck to paycheck and will likely require a little metaphorical belt tightening. Take a look at your spending records and identify necessary expenses such as your rent or mortgage payment, health insurance, auto insurance, loan and credit card payments, food, gas and household essentials. These are the building blocks of your budget. Don’t forget to include the taxes you’ll eventually have to pay Uncle Sam on the tips you’ve earned as well.
You can then start to find places where you can cut back. The easiest—though never fun—are luxury expenditures such as cable or satellite television, gym memberships, vacation travel, dining out and other entertainment. You may also be able to reduce a few of necessary expenses by changing insurers, refinancing loans or downsizing your living situation.
Divide your extra cash between high-interest debt payments and your emergency savings
Some experts recommend paying off all high-interest debts before bothering to build up savings. However, if you experience an unforeseen medical emergency or have a sudden, expensive car repair to deal with, chances are you’ll have to pay for it with your credit card if you don’t have savings available. For that reason, it can make sense to work towards both goals simultaneously.
If you have more than one credit card, start putting half of your extra funds towards the one with the highest interest rate each month while continuing to pay the minimum on the others. When you’ve paid off that one, move on to the next. Depending on your situation, it could make sense to open a new credit card that offers interest-free balance transfers and move some of your highest-interest credit card debt there—but only if you’re able to pay it off before the end of the interest-free period.
You can now start to worry about retirement
Once you’ve paid down high-interest debts and amassed enough emergency savings to cover six months of essential expenses, you can begin saving for your retirement years. At this point, it would be wise to consult a financial planner for assistance determining which retirement savings vehicles will be best for you.