In this series of posts, we are learning how to manage the home economy when it is powered by irregular income.
Over the last few posts, we have learned the first two steps to prosper with irregular income and put away the feast/famine lifestyle forever!
Step 1 – Recognize it! You must recognize that you are living with irregular income!
Step 2 – Determine monthly expenses It is important to understand how much income is necessary each month to ensure that the household operates smoothly and free from the feast/famine lifestyle.
Today, we look at the next step – Save up at least three months of monthly expenses.
Step 3 – Save up at least three months worth of expenses
WHAT?!!!! I am sure that is what many of you are saying right now! Yes, I did say that you need to save up at least three months of expenses. Remember in step two that you calculated your monthly expenses? Multiply that number by three, and you have your savings target. I call this savings the "Known Slumps Fund"! You know that slumps are coming, so be prepared!!! This is HUGE in eliminating that horrible feast/famine lifestyle!
WHY?!!! You might be asking this question. Why on earth should I save up at least three months worth of expenses? Man, I am glad you asked that question!
Let's say that you have monthly expenses of $3,000. This means that you need to have at least $9,000 in your Known Slumps Fund.
Let's look at a year's worth of expenses. Now, it is easily seen that this person has earned enough to make it this year. They have taken in $36,500 for the year. BUT look at how irregular the income is! Have you seen something like that before in your business? This causes life to be CRAZY. In January, you are eating ramen noodles like they are going out of style. February through April are decent, but then it dies again May through July. Famine of the worst degree! All of the sudden, August through October are awesome! Feasts abound! Then November and December come in with back to back terrible incomes. Back to the ramen noodles!
What should you do? Get a Known Slumps Fund that equals three times your monthly expenses!
Let's see what difference that makes!
When you look at this chart you realize the POWER of having three months expenses in the bank! Whether you have a $500 month or a $6,500 month, you live on $3,000 that month. That means that you get to EAT!!! That means that you can save money (remember the monthly expenses includes retirement savings!). That means that you can have some fun each month!
The Known Slumps Fund absorbs the irregularities of your income! Fill up your Known Slumps Fund – it will take so much stress out of your life!!!
Question of the Day: Which is more important to you - Debt reduction or funding your Known Slumps Fund?