Planning For Inconsistent Income
Kevin is an author without a consistent income. He's afraid to pay off the rest of his debt because he may not work again until next April. How should he handle this?
QUESTION: Kevin in Atlanta is an author without a consistent income. He's paid off 65% o his debt except for the house, and he's afraid to pay off the rest of it because he may not work again until next April. How should he handle this? Dave tells him to start divvying up his income.
ANSWER: You need to divvy up what's in the bank between three categories. Category one is you need an emergency fund of three to six months of expenses.
Category two is you need to budget or set aside an amount that equals the number of months before you think you're going to get an income times your monthly expenses. Let's say it's April before I get paid. I'm going to have 10 months before I get any money. It's $3,000 a month in expenses, so I set aside $30,000 to pay my own little salary, so to speak.
We need an emergency fund account. We need a salary account, and you can overfund the salary account. If you're not sure, you could say somewhere between 10 and 15 months you'll get a check again. Then you just set up 15 months' worth. You know then that you have the money to pay your monthly bills. You have your emergency money covered.
The rest of the money is what's called gravy, right? You can throw that at your goals whether it's wealth building or debt reduction or whatever. If you throw it all at that, you don't have any money to eat with next month and it's a long time until April. That's what causes the freak out. You don't have a system.