While the typical Singaporean salaryman goes home each night knowing he’ll be getting $x at the end of the month, those with a variable or fluctuating income know that just because you made a killing this month doesn’t mean you won’t be starving next month.
Whether you’re an insurance agent, a real estate agent, a salesman or a self-employed freelancer, you know the feeling of living like a king one month and like a karang guni man the next. Here are some rules to help you thrive on a variable income.
1. You need to be more conservative about how much you can afford to spend each month
Many people who earn the exact same amount each month spend almost all of it and are still able to sleep easy at night knowing that in exactly x days their bank account will be replenished with exactly $x. However, when you earn a variable income, unless you give yourself a generous buffer or have a sizeable volume of savings, you’ll find yourself running into trouble sooner or later if you adopt the same attitude.
On a variable income, you should always aim to be more conservative about how much you can spend each month than you would if you were earning roughly the same amount on a fixed income. This means that two people might be earning about $50,000 a year, but the guy whose income fluctuates from month to month should allocate himself a stricter budget than the guy with a fixed income.
How much you can afford to spend each month depends on how wildly your income fluctuates, but when in doubt always err on the side of caution. As a freelancer, I always aim to spend less than 30% of my average monthly income, knowing that some months I could end up earning less than half of what I did the previous month.
2. You need to be more conservative when building your emergency fund
As someone with a variable income, you not only need to make sure your spending never spirals out of control, you also need to be more conservative when deciding how big of an emergency fund to save up. In the event that you hit a dry spell where your income is lower than average for several months, you’ll need a bit of extra cash should anything unexpected happen.
While folks who earn a fixed income usually aim to save about 3 to 6 months’ worth of expenses, those whose income is variable, especially if they don’t have a base salary, should aim to save at least 6 to 12 months’ worth of expenses.
3. Never spend based on your projected income
Singaporeans are infamous for spending on things they can’t afford, based on the number of people who take ten year loans for cars and overstretch themselves when buying property. When your income is variable, be extremely wary when spending large amounts or making big purchases based on your projected income—even if you’ve just closed a big deal or booked a number of large assignments, there’s always the chance you won’t see the money or that it will be delayed.
For instance, if you’re a freelancer there’s always the risk that your client won’t pay up on time, and it could take months of nagging before you see your hard-earned cash. I’ve been shortchanged out of thousands of dollars worth of work in this lifetime, from tuition students who tried to run off without paying for months’ worth of sessions, to copywriting clients who went MIA after receiving a major invoice.
While a lawyer’s letter or making a claim at the Small Claims Tribunal almost always does the trick, payment could be delayed by weeks or even months, so don’t go spending that money before it’s in your account.
4. Always anticipate large amounts of spending
Got to replace a broken refrigerator, go for LASIK surgery or go on vacation in Bali next month? Unfortunately, unlike your steadily salaried friends, you can’t just sit back and feel at peace because you realised that month’s salary would be enough to cover all your expenses.
It is absolutely necessary that you always anticipate large amounts of spending in advance, and save up the money beforehand. Yes, it can all sound a little like saving up for a coveted toy by stashing coins in your piggy bank. But it has to be done, as spending money you don’t yet have can result in your having to rely on credit when things don’t go according to plan.
Do you have any tips for managing your money on a variable income? Tell us in the comments!