I have no idea how much money I’m going to make next month. With less than ten days before the all too short month of February comes to a close, my earnings prospects for March are still unsettlingly dubious. The same was true of my February earnings outlook back in January, and my January income projections back in December, and so on and so forth as far back as 2008 and my official entry into the post-collegiate workforce.
I’ve never had a steady paycheck. From my days as a performer to my years of survival jobbing to my present-day entrepreneurial ventures, uncertain, fluctuating income has been a fact of life.
Though undoubtedly a challenge, it’s also a choice. The fact is, if I wanted to go work a job with a steady paycheck and benefits, I could – thank you privilege. But I choose not to, and therefore, the onus is on me to take responsibility for the implications of that choice.
I admittedly used to bemoan my irregular income and use it as a crutch to justify all I couldn’t do, particularly within the realm of fiscal responsibility – budget, save, invest, etc. But I’ve since come to understand that true financial savvy isn’t achieved while waiting for other people to provide the solutions for you. You have to go out and lay the framework of financial freedom yourself, even if your income is irregular.
[tweetthis]Fiscal savvy isn’t achieved while waiting around for solutions. YOU have to lay the framework for financial freedom.[/tweetthis]
Saving Money in a Freelancer Economy
The fact is, it’s not just starving artists and entrepreneurs experiencing irregular income these days. We’re increasingly becoming a freelancer economy, which means each of us has to operate as our own mini business. No more waiting for the HR department to hold our hand and walk us through the realm of retirement plans.
Of course if you do have access to these traditional employer benefits you should absolutely take advantage of them, but the point here is not to wait around for that traditional employer relationship and benefit framework to finally save money.
“Americans are increasingly working in a project economy in which work can be multi-year, or even month-to-month. Intuit projects that by 2020 more than 40 percent of American workers will be freelancers. With income less predictable, saving for major goals like retirement can be challenging,” says John Sweeney, EVP of Retirement & Investing Strategies at Fidelity Investments.
That said, Sweeney offers a framework for responsible savings practices – even with irregular income…
Set Financial Goals
“Identify what you want achieve in the near and long term,” says Sweeney.
By engaging in your financial present through intentional goal setting, you empower your future – one, ten and twenty plus years from now.
[tweetthis]By engaging in your financial present through intentional #goal setting, you empower your future #personalfinance[/tweetthis]
Get grounded in the numbers you need to achieve your near and long term goals – whether it’s paying off your student loan debt, hitting a retirement savings target or taking a vacation this summer.
Build a system of accountability that brings your day-to-day actions into alignment with the things you want to achieve by breaking each goal down into a manageable monthly mini-target and track your progress regularly,
Grab your free goal setting and getting playbook here to start tracking your achievement.
Know Your Make or Break Number
Think of your life as a business. To commit to profitability, you must know your break even point. So… how much, at a minimum, does it cost to run YOU Inc?
- Start with a bare bones budget. For the purposes of calculating your make or break number, only consider your necessities.
If there’s anything you can safely, smartly and sustainably live without for a month, i.e. anything that doesn’t disrupt your ability to live and work normally, do not include it in this calculation.
Yes, include food, housing, transit, insurance, etc.
No, do not include new clothing, beauty treatments, entertainment, etc.
Write down your monthly bare bones budget total.
- Add a buffer. Life has a tendency to be more expensive than we anticipate, add a buffer of at least 10 percent to your monthly bare bones total.
- Add monthly financial goal targets. Take the monthly financial mini-targets identified in your goal setting and incorporate them into your make or break number.
If you have not included retirement savings, short/medium-term savings and debt repayment (if you have debt) in your financial goal-setting framework, go back to step one and include them now.
- Calculate Your Total
Bare Bones Budget + Buffer + Monthly Financial Goal Targets = Make or Break Number
Your make or break number is a benchmark for the financial viability of your life. Knowing it is critical, especially when you have irregular income. It will help you stay committed to making at least the amount necessary to avoid your “break” point each month, without sacrificing your financial goals.
The system of the make or break number makes your savings goals as non-negotiable as your food and housing. If you find yourself having to prioritize any of the elements that make up the make or break number over any of the others – for instance, choosing between food or housing, or retirement contributions and insurance premiums – you have reached the “break” point, leaving you with two options – reduce your bare bones expenses and/or increase your earnings.
Increase Savings As You’re Able
It’s no secret that many millennials are struggling just to keep their heads above break point. And once they finally get some breathing room, surplus earnings are quickly committed to Instagram-worthy experiences like travel and eating out.
I totally get it and I’ve so been there. That said, I firmly believe we can do better.
Not every penny of discretionary allowance, i.e. earnings that surpass the make or break number, have to be reserved for financial planning purposes. We can and should enjoy a healthy dose of fun money. That said, even the of smallest savings increases over time can have a tremendous positive impact on our futures, and that’s not something we can afford to discount, especially given the shifting retirement landscape.
According to recent analysis from Fidelity, an individual who increases their savings by just one percent every five years, (perhaps when receiving a raise or scoring a higher-paying job), for a total increase of five percent over 25 years, could receive $690 more in monthly retirement income. That’s a pretty major benefit boost for a one percent savings increase every five years.
Apply the one percent savings increase more consistently, once a year from the age of 25, for a total of twelve increases, and you could receive $1,930 per month in extra retirement income. Almost an extra 2k per month for increasing my savings by just one percent each year? I’m sold.
“This research clearly demonstrates the impact making small savings improvements can have on a young person’s retirement funding,” says Sweeney.
The benefits of saving early and often are nothing new, but seeing how it plays out in the numbers is hugely motivating, especially when you think about what an extra 2k(ish) per month can afford you – vacation, time with family, the opportunity to give back, but most importantly, freedom.
Honestly, I have no idea what life will look like or what I’ll want life to look like when I’m 65 (and beyond), but I do know that I’m still going to want to be living it on my own terms.
Save Money Regulary – Even with Irregularity
I know it’s not easy to use words like “consistent” or “regularly” in the context of irregular income, much less in regards to savings, but we can certainly work on committing ourselves to a make or break number that includes a baseline savings rate and increase our savings contributions as we’re more able.
“When you’ve gotten a high paying gig, made a big sale or experienced a financial windfall, amplify your savings by making a one-off, more substantial contribution to your IRA on top of your monthly baseline,” recommends Sweeney.
And remember, it doesn’t have to be huge. Prioritizing your savings doesn’t have to come at the expense of every other want and need in your life – saving for a home, paying off student loans, financing your dream vacay, etc. Just an extra one percent increase every so often can make a world of difference.