Man­ag­ing money for those with fluc­tu­at­ing in­come

Mint Asia ST - - Otherviews -

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.

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