How to budget when your income isn’t consistent #6

Watch the video or read the post below

Guess what? You’ve made it to the last post in this topic!

If you landed on this page and don’t know much about this blog series “Mastering Money for Writers”, I recommend starting from the Introduction or at least Part 1 before continuing.

Because by now you should know the following:

  1. Your Lowest Monthly Income
  2. Your Total Critical Monthly Expenses
  3. Your Total Discretionary Monthly Expenses
  4. The meaning of Cashflow & why Pay Yourself a Salary
  5. Why you should start filling your Water Bucket 

Hopefully some months, you’re still going to have money left over. You may not believe me now but there is something about being in the mindset that you’re in control—life rewards you by giving you more abundance. It’s almost as if it knows you’ve now got the tools to handle more wealth. That you’ll have a greater respect for the money coming your way, no longer consuming it without consciousness that more often than not ends up being wasteful.

Let’s now discuss these final steps.

Chapter 6: Pay Your Debts, Build Your Dream Fund, and/or Invest the rest

What you do with the surplus money you will have depends on your personal circumstances.

Pay Your Debts

If you have debts (credit card, personal & car loans, money owed to others, etc), it’s logical to attack this before you even think about things like investing. Because the nature of interest-ridden debts especially is, every single day, your unpaid debt is growing, which in effect is making you poorer and poorer. Banks and lenders use language to make it feel like it’s such a small amount and thus not a big deal as long as you make your minimum payments. But when you look at and understand the Maths, you might find yourself feeling sick… I’ll give you an example:

Let’s say you have a rewards credit card debt of $2000 with an interest rate of 20.24% p.a. 

Every day, interest is incurred on the current balance as follows:

20.24% / 365 days = 0.056% per day

0.056% x $2000 = $1.12 interest per day

This might not seem a lot, but if you didn’t pay that debt at all, in a year, your debt is now over $400 more! $400 could’ve been a plane ticket to a holiday destination, a couple of nights in a nice hotel, but instead, it’s making the banks richer.

How about if you’re making the minimum payments? 

The minimum payment is usually only about 2.5% of the closing balance. Let’s say you only made the minimum payments (the way the banks want), the maths is complicated but this calculator gives you a summary of how long it would take to pay that debt and the money you’ve lost in the process:

Image Source: https://moneysmart.gov.au/credit-cards/credit-card-calculator

So it would take you over 14 years to pay off $2000 and the money you’ve lost in interest over those years is $2908, 145% of what you originally owed! If you’re a banker, that’s a pretty damn good investment: loan $2000, get $4908 back. But if you’re the victim, it’s a huge burden, having that weight hanging over your head for over a decade…

So if you have debts, attack them first from the smallest debt to the largest (while making minimum payments for the rest).

For example, let’s say this is your debt hit-list:

  • Car fine: $200
  • Credit card 1: $500 (min 2.5% = $12.50)
  • Credit card 2: $1500 (min 2.5% = $37.50)
  • Car loan: $5000 (min 2.5% = $125)

If you have an extra $300 one month, the minimum payments add up to $175. After paying those, throw the $125 left at the smallest debt (the car fine), which will mean that it will be paid off maybe as soon as the next month!

Why the smallest debt rather than the debt with the highest interest?

Because being in debt is a crippling and demoralising experience. You need these small wins to feel like you’re making progress that will motivate you towards slaughtering the bigger debts.

Build Your Dream Fund

Let’s now talk about saving any extra. We’ve already discussed filling your Water Bucket, which will eventually be 3-6 months worth of your critical expenses. 

Start a Dream Fund for big purchases like a Holiday, Wedding, Dream Car, Editing/Publishing/Book Marketing, etc.

Get excited about this fund as you watch it grow! Think about this fund when you sacrifice coffee at a local cafe—instead imagining having coffee in, say, a cafe in Italy! Yes, we still have to wait for this whole COVID19 situation to blow over, but this only reinforces that you have time.

Invest

Now let’s talk about Investing. This is a topic that really needs a post (or two) of it’s own, but what I’ll mention for now is this.

It’s wise not to keep “all your eggs in one basket”. Yes, this is a cliche, but cliches exist for a reason. Like many individuals, businesses and investors have learnt from the past number of months due to the impact of COVID19, depending on only one source of income puts you in a very vulnerable position.

So investing allows you to reduce that risk should your main income source suddenly disappear.

But, and this is another very big BUT, do not ever invest in something you don’t understand, even if the advice is coming from a millionaire share investor! From experience, this is the guaranteed way to lose money. Trust me, I have lost thousands of dollars this way. I’ve made the money back now Alhamdulillah, but in investments that make sense to me.

So what do you do for now?

Start an Investing Fund while you learn more about how and where to invest.

In later posts, I’ll discuss Investing in more depth.

But otherwise, congratulations, you have completed your mission to master this topic of “How to budget when your income isn’t consistent”! 

Obviously, your initial estimations will not be perfect, especially as your circumstances change. Ultimately, if a budget is not working one month, adjust the values and see how you go the next month. Eventually, you will learn the right figures that work for your circumstances.

The best part though is, with this financial roadmap, how good will you feel seeing the abundance grow in your life, starting with in your bank accounts!

Until next time, praying for much blessings your way.

Raihanaty A Jalil

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Author: Raihanaty A. Jalil

Raihanaty A Jalil writes poetry and fiction and has been on a panel during Perth Festival Writers Week 2019. She has performed a reading of her work at the Wheeler Centre Melbourne during the Digital Writers’ Festival 2019. She currently sits on the board for Centre for Stories.