Making Cents with Liam Croke: Four areas to focus on if your income varies

Making Cents with Liam Croke: Four areas to focus on if your income varies

Self-employed people can see income fluctuate from month to month and need to plan accordingly

THERE are circa 331,095 people in Ireland who are self-employed, and many thousands of others who work in an industry where their income varies from month to month. For all those people, it can make managing their finances very challenging and even more difficult than normal.

When you don’t know how much you are going to be paid - or when it’s going to land in your account - it’s hard to know how much you can spend every month, and that’s obviously not ideal.

Many people choose to be self-employed or work in jobs where pay is variable, like those who receive commission only, but a major drawback to either is that uncertainty around how much they will be paid each month.

Not having that luxury of knowing that a fixed amount will be lodged to their account can lead to issues like not qualifying for a mortgage and or other type of loans, missed debt repayments, saving for the future etc.

It can be difficult knowing where to begin, and rather than just making it up as you go, which is how the majority of people I meet in this instance, manage their finances, there are strategies which if used, can help, and I’m going to share with you what they are.

1. Plan for the worst month

I think the best advice I can give anyone, is to plan for the worst - that being the month where the least amount was deposited into your account over the past 12 months. That is the figure you need to budget for.

If your best month was €4,500, and your worst €2,500, then plan your budget and spending around €2,500. In 12 months’ time, your worst month might be more, and if it is you can adjust your spending upwards, but for the time being, your worst month is your starting point going forward. This can be difficult and a big ask. Can you fit your monthly commitments into that amount each month?

2. Make a budget

This is why creating a monthly budget is so important, even more so if your income is irregular each month. You need to capture every expense you have, starting with those ones that have to be paid i.e. mortgage, rent, utilities, food, transport costs, loan repayments, insurances.

When you are creating that budget, there may be some discretionary expenses that have to suffer like eating out, new clothes, etc. but that’s ok for the time being.

Once you know your outgoings, you now have your break-even point, which is the amount you have to earn and receive to cover those expenses.

Is this number more or less than what your worst month is? If it is, good, and if not, revisit your budget, and see if there are expenses that can be reduced further, because your break-even number has to equal your worst month number.

People get into difficulty managing their finances not because they don’t know what they are earning each month, but because they don’t know what they are spending.

You need to know what that amount is and when you do, it’s a great motivating factor, particularly for self-employed people. They now have a number, they know they need to earn each month.

3. Create a Cash Cushion

If you have an incredible month, and much more is deposited in your account than what your worst number is then continue to pay yourself an income equal to that base number.

Just because you earned more, doesn’t mean you can spend it. You need to be disciplined and stay with that worst number figure. If you earned €2,000 above it, add it to your cash cushion. You need to create a buffer which will ease the pressure when you have a month which generates less than what your break-even number is, and that is when the savings you build up is there to fill in the shortfall.

This buffer differs from what we typically refer to as our emergency fund. The fund you are building up here is that cushion which is called upon to pay your mortgage or utility bills while you are waiting for invoices to be paid and money lodged to your account. So, the fund you are building up is for cash flow purposes only. You should have a separate emergency fund, which is untouchable and only called upon in a worst-case scenario situation i.e. you’re closing your business.

4. Don’t ignore savings

When I refer to savings, I mean long term savings like pensions. Becoming self-employed you are now more responsible for your future, and you don’t have the luxury of an employer paying your health insurance or putting money into your pension. You are very much on your own, which is why it’s important to pay attention to your personal finances, and make savings and paying down debt, as much as a priority as you would trying to get new business and customers.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at or

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