Managing money for those with fluctuating income
Ihave a friend who lives well when she earns more and gets into a frugal mode when business is bad. An artist, her income fluctuates, so does her lifestyle. Up when there is more and down when there is less. Her mood, though, is quite delinked from her financial status—always up. Last year, she said she wanted to start systematic investment plans (SIPS). Why? Because everybody around her was starting SIPS, and it seemed a cool thing to do—getting financial security is good, no? Yes, sure, but it has taken her the first 40 something years to get to even talk about financial security. Better late and all that. The first thing I asked her to do was to put down a number that she needed each month to live. It’s very difficult to pin down an average monthly expense for a person who matches expenses to earnings every few months. But the budgeting exercise, which is the building block for most plans, takes on much bigger importance for people with fluctuating incomes. Without knowing what you spend each month, there is no financial plan.
Doctors, lawyers, freelancers, small entrepreneurs and other freelance professionals have erratic income flows. Some months are good, the others not that great, but there are living costs that must be met to not default on rent or EMI, credit card payments, insurance premiums, school fees. Money to buy food must be there whether it is a good month or not. One way to think about how much you need is to break down spends into two buckets: ‘survival’ money and ‘living’ money. Into the ‘survival’ bucket will go your rent, EMI, spends on groceries (no, it does not include gourmet meals delivered home), household help costs, travel for work, utility bills, school or college fees and anything else that is essential for your life. ‘Living’ money will have lifestyle spends on eating out, movies, holidays, gadgets, and whatever else is part of your life’s higher needs. A good way would be to analyse your card spends for the past year and see where the money goes to get an idea. To the living cost number, add an average of the lifestyle spend over the year and that is your must-have income level each month, no matter what the income flow looks like.