I have no idea how much money I’m going to make next month. As August came to a close, my earnings prospects for September were still unsettlingly dubious. The same was true of my August earnings outlook back in July, and my July income projections back in June, and so on and so forth as far back as 2008 and my official entry into the post-collegiate workforce.
I have 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, my way of life is also a choice. The fact is, if I wanted to go work a job with a steady paycheck and benefits, I could. 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.
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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-benefits 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,” said John Sweeney, executive vice president of retirement and investing strategies at Fidelity Investments. “Intuit projects that by 2020, more than 40 percent of American workers will be [contingent workers]. With income less predictable, saving for major goals like retirement can be challenging.”
That said, Sweeney offers a framework for responsible savings practices — even with irregular income.
1. Set Financial Goals
“Identify what you want to achieve in the near- and long-term,” Sweeney said. By engaging in your financial present through intentional goal setting, you empower your future five, 10 and 20-plus years from now.
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 next 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.
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2. 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 Incorporated? Follow these steps to find out.
- 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 and related necessities. Do not include new clothing, beauty treatments, entertainment and related wants, and don't make these budgeting mistakes. 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. Add your Bare Bones Budget, your Buffer and your Monthly Financial Goals Targets to get your 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 or increase your earnings.
3. Increase Savings as You’re Able
It’s no secret that many millennials are struggling just to keep their heads above water. And once they finally get some breathing room, surplus earnings are quickly committed to Instagram-worthy experiences like travel and eating out. I get it, and I’ve been there. But we can do better.
Not every penny of discretionary allowance — earnings that surpass the Make or Break number — has to be reserved for financial planning purposes. We can and should enjoy a healthy dose of fun money. That said, even the smallest of 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 a recent analysis from Fidelity, an individual who increases his savings by just 1 percent every five years — perhaps when receiving a raise or scoring a higher-paying job — for a total increase of 5 percent over 25 years, could receive $690 more in monthly retirement income. That’s a pretty major benefit boost for a 1 percent savings increase every five years.
Apply the 1 percent savings increase more consistently: once a year from the age of 25, for a total of 12 increases, and you could receive $1,930 per month in extra retirement income. “This research clearly demonstrates the impact making small savings improvements can have on a young person’s retirement funding,” Sweeney said.
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 $2,000-ish per month can afford you: vacation, time with family, the opportunity to give back and — 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, but I do know that I’m still going to want to be living on my own terms.
4. Save Money Regularly — 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,” Sweeney said.
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 like saving for a home, paying off student loans and financing your dream vacation. Just an extra 1 percent increase every so often can make a world of difference.
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Stefanie O’Connell is a millennial money expert, speaker and author of the book, “The Broke and Beautiful Life." This article originally appeared on O'Connell's website, StefanieOConnell.com, on Feb. 22, 2016. It was updated for publication on GOBankingRates with permission. See the original article here.