How To Create A Strong Savings Strategy With Variable Income
The concept of saving is simple, but the execution is anything but straightforward.
It’s hard enough to create and stick with a savings strategy when your income is predictable. But for those with variable income, another element is thrown in the mix: the unknown.
Between lumpy commissions, stock options, and bonuses, creating a saving strategy when you have variable income is no small feat. We find that this requires a hands-on approach as it’s common for many of our clients to see large swings in their income year to year.
You have to turn off auto-pilot and form an intentional savings plan that works for your lifestyle needs both now and in the future. How can you build a strong savings plan that works for you? Let’s take a closer look at a few things you can do today.
Clarify Your Priorities
Your financial priorities are the bedrock of your spending and saving habits. By clearly defining them, you can direct your income toward those goals and away from others.
When defining your priorities, think about the things that are most important to you and your family like annual family vacations, a home remodel, children’s education fund, upfront collateral for a new business, etc. Once you know what your priorities are, you can start to make a plan to allocate funds to support them when possible.
It’s also important that you accurately rank your priorities. Is moving into a larger home a bigger priority than purchasing a new car? Does your family vacation come before any office upgrades? By ranking your priorities, you’ll be able to add more dimension to your savings plan and put money toward your top priorities.
Remember, your financial priorities can and will change. The things that are most important to you now might shift as you enter new seasons of your life and that is okay. What started as a regular trip to the beach might turn out to be the backbone of your retirement plan. No matter how your priorities may change, be sure you periodically check-in to ensure that your income is going toward the things that are most meaningful to you.
Create Savings Buckets
Here at Beyond Wealth, we are big believers in a “bucket strategy” for saving. This is a process of separating accounts for specific goals. This strategy is especially useful for people with variable income as it is a visual representation of your financial priorities and the funds supporting them.
How does it work? For every goal, you create a corresponding account to save specifically for that goal. So if your top 4 goals are:
Annual vacations/travel
Buy your dream car
Home projects/updates
You would have an account designated for each of those goals. If you have 4 or 5 different goals, then you should have 4 or 5 different accounts that can be “filled up,” when you get that big bonus check or when a large commission comes through.
This way, it’s easier to stay on track since you have a physical representation of your progress toward each goal as opposed to all of the money accumulating in one big account.
Ultimately, this increases clarity, boosts motivation, and allows you to create both short and long term savings goals. With a bucket strategy, you can see if you need to allocate more funds to a certain goal one quarter and to a different goal in another, providing extra flexibility in your plan.
This strategy can also be useful for months when you make way more income than your base needs. We encourage our clients to slide that excess money out of their checking account and into a savings account, letting the balances accumulate for a few months. We then analyze the best way to deploy those excess funds to “fill up” their aforementioned savings buckets.
Prioritize Your Emergency Fund
We know that talking about preparing for a car emergency is far less glamorous than saving for your retirement home on the beach, but building up a healthy emergency fund will go a long way in adding security and independence to your financial plan.
Perhaps the last thing you want to worry about in an emergency is how you are going to pay for it, and a strong cash reserve can keep you from turning to credit cards and amassing more debt on top of an already difficult situation.
Emergency funds are critical when creating a savings plan with variable income because there may be some months you will need to draw from it in order to cover basic income needs. This is a tough concept for people to grasp because typically emergency funds are only discussed in the context of a housing, car, or medical emergency.
But if you experience a month where your income falls a bit short, you may need to draw from your emergency fund to pick up the tab. This is a perfectly normal and natural strategy for many professionals. As long as you are cognizant about replenishing the fund when times are good, you should feel comfortable to draw from it when you need to.
Along with tapping into your emergency fund, you can also look into using a home equity line of credit (HELOC) to help bridge those extra expenses that come up. While different from a cash reserve, when used appropriately a HELOC can be a useful financial tool. Be sure to talk with your advisor about your unique situation before moving forward.
How Beyond Wealth Can Help
Here at Beyond Wealth, we are no stranger to serving clients with variable income. We know that you will experience a different way of crafting your plan and we are here to help you do it in a way that remains authentic to you, your goals, and priorities both now and in the future.
By clearly defining your priorities and properly allocating resources, you will be able to use your money to help you live the life you want. Ready to learn more? Get in touch with our team today.
Andrew Comstock, CFA
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.