Automating Savings on an Irregular Income
One of the tenets of personal finance is to pay yourself first. And one of the most sure-fire ways to make sure you do that is to automate your savings: setup your checking account to make an automatic deposit to your saving accounts.
Automation has been incredibly effective for me. I have targeted sub-accounts for property taxes, auto repairs, house savings, and more — a tactic I learned about here. The first year my husband and I had to pay property taxes, however, the billing statement felt like it came out of nowhere — was it really due already? Luckily we had the cash, thanks in part to a very generous wedding gift sent the month before, but that was pure luck. If not for that, we would have had to suspend our debt repayment and possibly dip into our tiny (but growing) emergency fund. When we paid property taxes the next year (and every year since), all I had to do was transfer the money from savings into our checking account, then pay the bill. Much less stressful!
Automation on uncertain income
One of the downsides of being self-employed, however, is that my income is irregular. Irregular income is a reality for most freelancers, as well as people who are paid on commission or on tips, to name a few.
We still have the important expenses — like home insurance, taxes, and retirement contributions — on automation, but a large chunk of our income is being directed toward saving to build our house. Since I'm never sure exactly how much I'll make each month, I've been hesitant to designate a set amount to be automatically withdrawn for that particular savings account. What if a client was late sending payment? And what if that automatic transfer slipped my mind and I forgot to cancel it for the month?
Instead, I've waited until bills were paid and automated withdraws cleared, then transferred the remainder (minus some padding that I leave in checking) to our house savings account.
This has worked out okay, but sometimes I forget to make the transfer, and then I'm stuck trying to sort through how much was left at the end of last month, along with whatever expenses we've had since then. Also, I like having a system — with automated payments, I can predict how much will be in our account in six months or a year. This is particularly helpful for our house savings account, since we're paying cash to build our home. Finally, there's no temptation to spend the money. We're pretty good about that, but with automation, it's becomes a certainty.
This month our income and expenses had some big changes. In order from smallest to largest, here's what has changed:
- Yoga membership. I was paying $70 per month for unlimited yoga classes, but cancelled my membership because there were no longer enough classes I liked on the schedule. For now, I'm paying about $44 a month for a per-class pass, and my fellow yoga practitioners and I have set up group practices (free). I also revived my home practice, but cancelled a $15-per-month subscription to online yoga classes. This is a total savings of $41 per month.
- Fuel expenses. I no longer drive to yoga class every day. When I do drive, I make a list of all errands I can run while I'm out to prevent additional trips to the store. And once a week my husband works right around the corner from my yoga studio, so I carpool with him, go to class, then work from a library or cafe until he's done. After doing this for almost a month, I estimate I'll save at least $45, which I think is a conservative figure.
- Student loans. My husband's student loans came due in December, meaning a new $202 payment each month.
- Paid off land. Five years ago we bought an unimproved 2.5 acres where we're now building our home. We elected for a 5-year loan to force ourselves to pay it off quickly, and guess what? As of January 15, we own the land free and clear! This frees up $710 each month.
With these savings and the new expense, we now have $594 of “found” money. This money used to be tied up in other expenses, and even after I quit my day job a year-and-a-half ago, we never had a problem paying them.
I realized this is a perfect time to automate our house savings. Instead of making the transfer of the extra $600 each month (may as well round up, right?), I set up an automatic transfer of $600 from our checking account to our savings. Of course I'll still have to transfer anything above that amount, but for now, the $600 inches me closer to automation.
Additional income, snowballed
A little excited about the idea of automating our house savings (I'm kinda nerdy like that), I started to think about other ways to automate more of our savings.
Right now I'm talking with a client about working together on a more regular basis. This client has always paid on time, and I'd be writing for them biweekly. This new income source could be funneled into our automated house savings, since it will be predictable (well, as predictable as an income source or job can be). I can do the same thing with any future, regular work.
I held off on automating our house savings because of my irregular income, but even people with a fluctuating salary can automate a good portion of their savings. Start with found money from paying off debt or cancelling a subscription you haven't used in months, then increase the amount even more if you have extra, regular income (above what you need to pay the bills). This might be income from a second job, a side business, or overtime you work regularly, as examples.
Finally, remember that even small amounts will start to add up. That's something I dismiss sometimes because a few dollars doesn't seem like enough to make a difference. But if we downgrade our Netflix membership, something I've been considering based on our rental history, I plan to add the $8 savings to the automatic savings deposit — I guess I'm feeling extra motivated!
If you have an irregular income, what is your savings system? Do you automate your savings, or do you have a hybrid system like mine?