Automating your savings and investments is one of the most important financial principles in personal finance. Automation takes away the decision process and literally makes it an automatic thing every month. Automation sets you up on the fast track to pay yourself first, another one of the most important financial principles to build long term wealth.
Spend the time to set it up once and the hard work is done. Of course you’ll need to make periodic adjustments as your income increases or decreases, but the infrastructure is there.
Automation is easy to setup if you’ve got a salaried position or any line of work with a steady paycheck. For example, a two income family bringing in $10,000 every month after taxes can easily automate incoming money to meet their goals.
If this family wants to invest 20 percent and save 5 percent of their income, they would need to automate $2,000 per month into an investment account and $500 per month into a general savings account. With a predictable and steady income, this is easy to set up and consistently implement.
But what about someone who doesn’t have a steady income? This could be someone in sales, an hourly worker with inconsistent hours, or someone who gets seasonal overtime opportunities. The income is there, it just comes at different times and amounts.
For example, a salesperson might make $9,000 in commissions one month, $3,000 the next month, and literally zero the next. Someone in this position surely can’t live every month as if they’re making $9,000 or they’d go broke very quickly.
It’s important to set up a system to pay yourself first and automate a certain percentage to investments. Flying by the seat of your pants month to month without a plan is a recipe for financial failure. I believe the best plan is to regularly contribute a consistent percentage of your paycheck to your accounts.
Determine how you want to allocate your money, and take that percentage from each check. For example, a salesperson who wants to invest 20 percent of her income. She made $8,000 in January, $4,000 in February, $4,000 in March, $5,000 in April, $6,000 in May, and $5,000 in June. She would automate by contributing the following dollar amounts:
- January: $1,600
- February: $800
- March: $800
- April: $1,000
- May: $1,200
- June: $1,000
- Total percentage of income going towards investments: 20 percent
This is automation in the sense that she is taking the exact same percentage of her income every month. But there’s also a manual component in that the dollar amount each month significantly varies. This is not “automate it and forget it” because she has to manually set up her contributions based on her varying income. This isn’t hard to do but it does require remembering to do it consistently.
Since her income is inconsistent and doesn’t always cover her basic monthly expenses, she’ll also need to create a general account she can pull money from, preferably an online account where it takes a couple of days to access the money. If she requires $3,000 per month to cover living expenses such as mortgage/rent, transportation, food, entertainment, etc., she’ll pull that money from her online savings account.
For example, in January when she made $8,000, things were pretty easy. She paid herself first by automatically contributing 20 percent of her income, $1,600 in this case to an investment account. She then contributed 10 percent to her emergency fund, five percent to her vacation fund, and five percent to her car fund.
- Investment account: $1,600
- Emergency fund: $800
- Vacation fund: $400
- Car fund: $400
- Total: $3,200
After paying herself first, she allocated $3,000 for her monthly living expenses. That left $1,800 to contribute to her general living account for months when she doesn’t make as much. Each dollar is accounted for and given a specific task. None of the money just sits there waiting to be spent. She’s got a plan to cover this month, and future months.
She didn’t do nearly as well in February as she did in January so her numbers are going to look much different.
- Investment account: $800
- Emergency fund: $400
- Vacation fund: $200
- Car fund: $200
- Total: $1,600
Notice that despite not doing as well in February, she remains consistent in paying herself first. Even with fluctuations in her income, she always pays 20 percent into her investments,10 percent to her emergency fund, five percent to her vacation fund, and five percent to her car fund. This never varies, even if her income does.
Since she made less in February, she’s going to be a little short of the $3,000 she needs for the month. After paying herself first, she’s left with $2,400. Since she’s $600 short of the $3,000 she needs, she’ll pull that money from her general savings account to cover the difference. That gives her exactly $3,000, which is enough to cover her living expenses.
In March, she made the exact amount as she did in February, so the numbers are going to be identical. In April, sales pick up and she makes $5,000 for the month. Her April numbers look like this:
- Investment account: $1,000
- Emergency fund: $500
- Vacation fund: $250
- Car fund: $250
- Total: $2,000
That leaves $3,000 for living expenses, which is the exact amount she needs to live on. She’s not able to contribute extra to her general living expenses fund but she’s not having to pull money from that account either. $5,000 is her “break-even point” where she can make all her monthly contributions and have just enough for her general living expenses. For the purposes of this blog post, “break-even point” just means she’s not having to pull from her general living expenses account.
Anything over $5,000 and she’s able to save extra in her general living expenses account for leaner months. Her goal is to make over $5,000 per month so she doesn’t have to pull from her general savings account, and can actually contribute towards it. In other words, as long as she’s making $5,000 per month or more, she’s in great shape.
If she begins to average less than that, she’ll need to either cut her living expenses, get a roommate, or reduce her monthly contributions (something she’s unwilling to do). In these first six months, she’s averaging $5,333 per month so she’s meeting her goals in the short sample size. Ideally, as the years pass and she improves at her craft, she’ll make more and start to really exceed her current numbers.
Summary
It’s possible to have inconsistent income and still automate and pay yourself first. It takes a little more work and planning than someone with a consistent income, but it definitely can be done. The first and most challenging step is making up your mind that you will pay yourself first. After that, it’s just in the execution.
