How to Manage Money If You Make Cash Tips

I’m willing to bet that we’ve all had the experience of getting a gift of cash — maybe $50 from a grandparent for our birthday, or $100 from a parental unit for groceries, or what have you — and opening our wallets a few days later and wondering where that cash went.

If you’re not paying attention, cash spends pretty darn quickly. In a blink, it seems, it’s gone. And that’s all well and good for the “windfall” cash you might get, but if you work for tips, and that cash is the bulk of your income, it’s a problem if it just *poof* disappears.

So what do you do about it? That’s what I’m here to tell you.

Earning the Money

Those of you who work in the restaurant industry will probably be familiar with this situation:

You make roughly $3.00 an hour, on top of which you earn tips, between 10 and 20% of your sales. Out of this you have to buy food, pay rent and your other bills, and maybe have a little fun, too. If you’re any good at what you do, you often walk away from work at the end of the night with $100 to $400 in your pocket.

Servers and bartenders are not the only people who get tips, of course. Massage therapists, taxi drivers, and delivery drivers (among others) all have a version of this story. Some don’t rely as heavily on the cash they get from tips as servers and bartenders do, but they would certainly feel it if they stopped getting tips at all.

Taxes and Claiming Your Tips

Of course, you’re supposed to claim all of your tips, both cash and credit (the credit tips get reported for you, of course), but almost no one does. What many servers I know do is they report their tips as though they had earned 15% of their total sales in both cash and credit card tips. So if they had $500 in sales, and made $50 in credit card tips, they would claim $25 of their cash tips. They could have earned no other tips beyond that, or they could have another $50 or $75 in their pocket.

Why Report Anything At All?

The reason you want to report at least some of your cash tips is because, most billing places don’t accept cash, so you have to deposit the money into a bank. Which means that, one way or another, you’re showing that you’ve earned the money.

It’s also a good idea not to pay for necessary things (like groceries) with unclaimed cash, because then it looks like you’re not spending any money on food, which is suspicious and potentially problematic.

So the problem is that you can’t spend your cash earnings willy nilly, but it’s hard to fight the urge, because it’s right there, burning a hole in your pocket. Unlike people who get a check that they have to deposit before they can withdraw cash, you’ve got it all right there, and it’s really easy to just fritter it away.

So what do you do?

The Solution

When I was as server, I quickly learned that I had to claim more than 15% of my cash tips, I decided that I had to figure out how much I was spending every month, so I could know how much I had to claim.

In order to do that, I put together as short list of all my expenses during the month and figured out how much money I had to make each month to pay them. With rent, bills, student loans, gas, food, etc., I spent about $900 a month.

I knew the if I worked 20 hours a week (pretty average for me), I made $42 from my hourly wage, and usually made between $70 and $150 a shift in tips (depending on what time of the day, what day of the week, and how busy we were), which adds up to around $390 in tips each week.

So over the course of four weeks, I would make $170 from my base pay, and roughly $1,500 from tips, totaling $1,670.

Because my expenses were $900 a month, I knew I had to make that $900 before I did anything else with my money. But I didn’t want to have no fun the first two weeks of the month when I was waiting to build up the $900 I would need to pay my bills, so I determined that $900 is 60% (rounded up) of my average monthly income, so (assuming people tipped consistently, and I was scheduled a similar number of hours each week), I had another 40% to play with.

This is what I did:

Every night, when I got done, I claimed up to 60% of my total tips, because I knew I was going to have to use that money to pay bills. I took 20% of my cash tips for that night and put it in my wallet for fun spending, and I left the rest in my “book.” When I got home I would take the money out of my book and put 60% of my cash tips in a jar labeled Expenses, and the rest in a jar labeled Savings.

Here’s an example:

Say I made $120 in tips. $20 on credit cards, and $100 in cash.

Because $20 is 20% of $100, I only had to claim another 40%, or $40.

I would stick $20 in my wallet for fun (helpful when going out to the bar with my co-workers later, but I knew that once it was gone, and I couldn’t spend any more until I got more).

When I got home I would put $60 in my jar labeled “Expenses” (the extra $20 I would save to pay the taxes on the cash tips I claimed), which I would deposit in the bank at the end of the week when I got my paycheck (we were paid weekly).

The rest, in this case $20, I put in a jar labeled Savings/Emergency Fund, which I would use if something went wrong with my car, or I had some other unexpected expense.

The Lessons

1. You have to claim enough of your tips to pay your bills, otherwise it looks suspicious.
2. Whatever you put in your wallet as “Fun Money” is all you have to spend on frivolous things. Once it’s gone, it’s gone. You can’t spend any more until you earn more. This may seem like a pain, but you don’t want to get to the end of the month and not be able to buy groceries because you decided to get a new phone, or a new pair of shoes, or a tattoo, or whatever.

NOTE: My math assumes that you have some sort of buffer in your checking account so that you can pay the bills that come up while you’re amassing more money.

Ideally you would have enough in your account to pay all of your expenses, so you’re paying this month’s bills with last month’s money (One of the Four Rules of YouNeedABudget[affiliate link]).

If you don’t have that, I recommend having enough in your account at any given time to cover your rent.

Baring that, you should have at least $200 in your account at any given time. I know it can be hard, but the peace of mind is worth it.