Inconsistent Income Series: Creating a Savings Strategy

In today’s world, many people don’t have a consistent income. Whether you’re a W2 employee who has a commission-based salary that fluctuates, or you’re a full time entrepreneur who has income that ranges depending on the number of client assignments you receive - you know the ups and downs of unpredictable paychecks.

When your income isn’t reliable, it can feel like life's a roller coaster. When things are good - they’re amazing! Good months bring a boosted savings account, extra payments toward any debt you carry, and spending on fun things for the family - like vacations, or dinners out with close friends. But when your income drops off? Things feel uncomfortably tight. You may have to slow your debt payments, reduce spending dramatically, and possibly dip into your savings to cover all of your expenses. These ups and downs can be incredibly stressful, and they make it all the more important to build a savings strategy to regulate your financial plan.

The Importance of Saving with Inconsistent Income

Irregular income can be an emotional drain on both you and your family. People find it hard to set and reach goals, and the nervousness that funds will dry up can be tough to contend with. This is why saving, regardless of inconsistent cash flow, is incredibly important. Creating a nest egg can help to alleviate the stress of lumpy paychecks - and put you on the path to long-term financial success.

The key to saving with lumpy income is to address both where to save, and how to build your strategy. Once you have clear savings goals, and a consistent plan for reaching them, the process becomes significantly less intimidating - and easier to stick with for the long term!

Where to Save

When you’re dealing with lumpy income, you’ll want to do two things:

Protect yourself against immediate emergencies that could drain your finances or low income months that force you to pull from savings.
Work to save for your future - even if it means starting small.

Let’s address your first savings goal - insulating yourself against immediate financially draining emergencies. As someone who has irregular income, your emergency savings nest egg has to work twice as hard as most people’s. Your emergency savings account needs to accommodate both financial emergencies and the low-income months that push you to tap your cash savings.

Many financial planners recommend that people have an average of 6-9 months of living expenses in an accessible, cash savings account in case of emergencies or job loss. However, for you and your family, a larger emergency savings might be necessary to cover all of your financial needs.

Once you’ve worked to protect yourself against immediate financial emergencies, you can start to think ahead. Saving for retirement doesn’t need to be a daunting task - even if your income isn’t consistent. In fact, starting small is always better than skipping it altogether. Compound interest positively impacts your retirement savings over time by acting like a snowball rolling down a hill.

Even if the snowball is small at the beginning, with each revolution it picks up more snow. And as it grows, it’s able to pick up even more snow with each turn. Eventually, even the small snowball you had at the start grows into something substantial. Compound interest acts this way with your retirement savings. Over time, your nest egg will grow, and continue to grow exponentially faster as your dividends grow with time. The key is to get started!

How to Save

If you’re a freelancer or business owner, or even if you receive lump income from your full-time job, saving can be challenging. Luckily, there are several ways that you can get started:

Set up automations. If you consistently rely on yourself to put money away into savings, you’re more likely to skip savings and hold onto the funds for spending. This isn’t because you don’t have the intention of saving! Everyone makes mistakes, and in a lumpy-income situation, the temptation to spend the funds when they’re there can be huge. To avoid this, take out the possibility for human error. By setting up automatic deposits into a cash emergency fund, or into your retirement savings, you’re committing to creating a financially stable future for yourself.
Decrease your expenses. One way to free up the cash flow you need to save more is to decrease your living expenses. This may mean cutting out small expenses, like cable or eating out. It might also mean downsizing your home, or working to pay down your debt faster to eliminate a monthly obligation.
Create a budget. If you create a budget that fits within your low-income months, you’re more likely to be able to save during high-income months. Creating a budget that lines up with your values can help you lead a fulfilling life while still living within your means.
Play the long game. Pressuring yourself to fulfill impossibly high short-term savings goals increases your risk of burnout. Instead, play the long game. Even if you’re only saving a small amount each month, consistency is the most important thing you can focus on.

Asking for Help

Saving with a lumpy income can be an exhausting task, and it’s easy to abandon your strategy if you don’t have one that fits your lifestyle and your needs. Working with a financial planner can help. At Michael Brady & Co LLC, we help our clients create a savings strategy that puts them on the path to reach their long term goals while empowering them to live a life they love in the present. Are you ready to take charge of your savings strategy? Contact us today! We’d love to help you and your family overcome the challenge of a lumpy income.