Being self-employed has the challenge of dealing with fluctuating income. A fat check in some months, and a smaller amount for some months. Under these circumstances, how does one save and invest to achieve one’s long term financial goals?
We all know that the process of budgeting and investing is much simpler with a stable income. However, we live in a world of freelancing and commission-based jobs that makes investments and savings even more difficult. Here are some ways how to save and invest with a fluctuating salary.
Map Out the Income for Next Year
Try to map out your income patterns based on your past income data. It will help you estimate your income for next year. If you have received a check of SGD6000 a month, a check of SGD4000 for another month, and SGD5000 for all the other months- you could project a monthly income of SGD5250, based on your yearly average. A more conservative estimate will take the lowest income of SGD4000. It is with this income that you need to manage your expenses and savings.
Create a Basic Budget
The next step is to categorize your expenditure into two categories: needs (essentials) and wants (non-essentials). The essentials are your monthly expenditures on food, rent, groceries, and utilities. Under no circumstance, it could be done with. There is expenditure on non- essentials that includes discretionary expenses like shopping, exotic vacations, and entertainment like movies or dine outs. Keep in mind that your discretionary expenses are to ensure that you are not overspending as compared to your estimated income.
Use an Old School Spreadsheet to Budget
There are tons of budgeting apps that can automate your savings, budget, and even pay bills for you. But even with all this new technology coming in, a simple spreadsheet is a better option if you have a fluctuating income. With the help of the spreadsheet, you can keep track of all your income, and know exactly how much you can afford to save and invest. Also, these budgeting apps only catch what is in your bank. You might receive cash tips or may even prefer to cash a paycheck than deposit it in the bank. Get started with the budget template for Google Docs or Microsoft’s official budget template for Excel. Insert all the numbers what you calculated, including essentials and non- essentials. Once you have figured what budgeting templates to use, pick a budgeting method. You could use the 50/20/30 rule and zero-sum budgeting.
Convert all your financial goals into your savings targets. For example, if you plan to build a retirement egg over the next 30 years, start working backward. Look at how much you need to save quarterly, half yearly or yearly by investing in equities and debt in proportion to your income. Aim to make investments early during the month before making any household expenditure, and use your account to do it. If you find monthly investment a stretch, consider investing on a quarterly or half- year basis. Any excess in the personal bank account could go towards making further expenses.
Give Yourself a Paycheck
Create two bank accounts-one is your account, and the other one is your business account. Give yourself a paycheck every month by transferring money from your business account to your account. The amount that is transferred would be equivalent to your budgeted household expenditure with your savings target. The excess amount, which is in your business account, after paying the salary and other business expenses, will remain untouched. The amount could be used to pay non -recurrent expenses like taxes, and the rest could be transferred to your account as a quarterly or annual bonus. Use it to invest in equity and debt funds. You can even revisit your monthly checks after a year based on your new earning patterns. Paying yourself is helpful because the separate holding account would grow, and you will always have the amount to pay for the bills and live a comfortable life. Whatever is left over in the holding account, can be used to pay extra toward debts, could go into an emergency fund or can also be used as a cushion for the slower income months.
Create a Cash Buffer
Does the question arise that how would you give yourself a monthly paycheck when your salary is irregular? The three-month cash buffer comes in handy here. It should be made over and above your emergency fund. The cash buffer would ensure that your savings and the budget plan are going well because of a few bad paying months. Some of these funds could even be saved in good performing liquid fluids.
As compared to your regular nine to five jobs, working and planning your future on a fluctuating income requires more discipline in financial matters. By exercising certain restrain in expenses when income levels hit a high, and by resisting the temptation to create a cash buffer when it hits a low, you can not only get full control over your finances but also move closer towards your financial goals.
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