ThriftyGal of the blog Chasing Prosperity made a good point on my retirement post about $20,000 being sort of conservative for someone who makes $100k/year.
(Read: “Just stick a fork in me when I’m 50-ish!“)
And she’s totally 100% right.
However, as a freelancer, income is a bit trickier to pin down as a confirmed amount than working for a company and getting paid bi-weekly.
Therefore, $20,000 to me, is a good goal as a bare minimum even though I am making more than $100,000 a year right now.
Here’s the reasons why:
I am being realistic, rather than conservative
I don’t always work full-time.
This contract is a rare opportunity that is not even guaranteed to last either!
They could boot me out at the end of March and my plans for my future earnings could go up in smoke.
I am not mad about it, I am just trying to be really conservative and not expect what hasn’t been confirmed.
See, without statistics, I cannot say: “I will make $60,000 this year, and $20,000 can FOR SURE be set aside for savings.”
There are months where I won’t work, and there are months where I will work a lot.
I need at least 5 years of stats for that, and I am currently pushing 2 years.
- From Aug-Nov 2008: $90,000 as a freelancer (note: I was with a company before)
- All of 2009: $0
- Now, am earning a confirmed: $34,500 which is really $24,000 after expenses
I am hoping to stay on and work until end of 2010, but nothing has been put on paper yet or signed, so I can’t count my chickens before my eggs have hatched.
My real “secret” plan is to save as much as possible
With uncertain and unsteady income, I have to save as much as possible. No ifs, ands or buts about it.
So for example, if I work for the whole year, I will gross $190,000, or $154,000 net.
Note: I am taking out January because I started a month into 2010, and July because I am going to Europe for a month. In a full year, it’s really $230,000 gross taking into account holidays, or $186,300 net.
I am going to save as much as I can of that $154,000, because…..
…I have my priorities set in a laddered system
This is something I’ve done, even earning much, MUCH less than that (on minimum wage), because you should always know how to prioritize where to put your cash which means paying for shelter, food and warmth.
The rest is just bonus.
Since I cannot count on that income as being confirmed yet, having my money priorities set out beforehand are so much more important!
Therefore, I cannot say: 25% of my paycheque will go to savings, 30% goes here, and so on.
I need to allocate the money on a laddered system based on when I earn/get it.
If I don’t have enough banked to move on to my next priority, then I don’t move on until I do.
And they go a little sumpin’ like this:
Here’s a handy chart and my notes will follow.
Priority #1. Expenses for the whole year = $20,000
I need about $25,000 net this year, so all of the money that I make (net) up to $25,000 will go towards living expenses for 2010.
That, is just cash in the bank to pay for expenses so I don’t have to worry about having saved/spent too much on other priorities.
This is my true #1 above all the others.
Last year, I spent $30,000 in net expenses, but this year, I have a plan to spend $20,000 as I am going to try and control that this year.
Priority #2. Expenses for two Emergency Fund years = $50,000
Like in 2009 when I didn’t work*
*As rightly pointed out by ThriftyGal:
Yes, I could have worked another job, but aside from my French not having been strong enough to work in even a minimum wage job for most of 2009, the bigger thing is that I also chose not to work a minimum wage or a 9-5 job because I had the financial savings and the option to do so.
I will need another $25,000 for one year, but I am actually shooting for $50,000 as my emergency fund because I feel good with 2 years.
I am saving an extra $5000 over what I expect to spend, because I like having some extra room.
I am putting it all into high interest savings accounts and other safe, super conservative investment vehicles.
This does a double duty, because it’s subtly a part of my retirement plan as well, but I won’t consider it as such.
Priority #3. Retirement Savings = $20,000
Max out my RRSP.Put the rest in laddered savings.
My TFSA is already maxed out with Priority #2.
This is my bare minimum for retirement for 2010.
Priority #4. Fun = $10,000
I honestly cannot think of anything I’d like to buy, but I like leaving myself some breathing room after being so serious with my earnings.
Need to have a break once in a while!
I’m probably going to spend some of it in Europe, eating wonderfully foreign candy, and buying foreign products.
Priority #5. More Savings = $54,000
Anything left over = bonus to be banked as savings.
I can draw on this to help pad up my retirement funds in future years, or for whatever I’d like within reason.
But it’ll all stay as savings.
So, that’s the plan.
It’s a bit unusual, but I think everyone follows the same principles/strategy in theory, just perhaps not as regimented or as conservative.
Everyone spends their money on what they value the most.
Just look at your spending for last year (if you have the stats), and see where you spent the MOST money.
The top 3 spending amounts are what you value most in life, and hence where you put your cash.
I think mine was Retirement/Savings, Rent and then Food.
The rest were considerably smaller amounts in comparison, except for the shopping & electronics part that scared me.