My finances 10 min

How to save on a fluctating income

Here's how to put money aside regularly when your income changes from month to month.

By Fonds de solidarité FTQ

If you're self-employed, a seasonal worker, or a tip employee, your monthly income varies throughout the year. But just because you're not on a salary doesn't mean you can't save. Even with a fluctuating income and no group retirement plan, saving is possible. In the following article, two self-employed workers and two experts share their thoughts on the subject.

  • Luba, freelance translator and editor
  • Julie,* psychologist in private practice
  • Geneviève Millette, CPA auditor, F.P.I.
  • Antoine Laflamme, CPA auditor, F.P.I.

Make a budget

The experts we spoke with agree that the first step of any savings strategy is to make a budget. This is especially important for those who are self-employed or have variable income. "Before committing to self-employment, you need to have a plan to ensure your success. What service will you offer? How will you sell it, and to whom? Achieving your savings goals requires the same approach," says Antoine Laflamme, CPA auditor and financial planner.

"You need a plan! And the first step is to make a good old-fashioned budget. Even if your income varies, some expenses are fixed. If you identify these expenses and track your spending closely, you'll be better able to plan for your needs." – Antoine Laflamme, CPA auditor and financial planner.

When she started out, Luba, a self-employed editor and translator, had a small pool of clients. She didn't realize how important it was to track her finances every week. "Over time, as my clientele grew, it became a necessity. I'm really glad I've made a habit of it," she says. "Today, I use an Excel file to manage invoicing and to calculate GST and QST."

Julie, a psychologist in private practice, reviews her finances on a month-to-month basis. "Since my expenses are relatively stable, I can take stock each month and easily track my cash flow. This lets me see exactly how much money I need. I can then deposit the rest in a savings account for unexpected home or work-related expenses. I like that I control how much I put aside and that I can adjust the amount each month."

A good budget will allow you to keep an eye on your monthly income and expenses and evaluate your ability to save.

"If you have an unstable income, you need to be able to adapt. Managing costs can be difficult. If you only do the math at the end of the year, you may not realize you're losing money," says Geneviève Millette, CPA auditor and financial planner. "But even with a fluctuating income, it's possible to achieve some monthly stability and save."

Julie's financial planning is based on her clientele. "A client I usually see every week may cancel their appointment or suddenly decide to reduce the frequency of their visits. In that case, I have to decide whether to fill the spot right away, at the risk of overloading my schedule, or to wait and either follow up with the client or reassess my availability and incur a loss. Planning my schedule every week was becoming too stressful. Now, I plan two weeks ahead to have a clearer perspective. And by tracking my spending each month, I get a better sense of my overall finances."

Determine your ability to save

The idea is to integrate saving into your budget, just like a regular expense, so that it becomes a habit. "It's the pay-yourself-first approach," says Laflamme. "There's no overstating it: putting a little money aside each month, as soon as possible, helps you ensure your financial stability and prepare for retirement. The earlier you start saving, even if it's only a small amount, the more you'll benefit. Through the magic of compound return, your money will multiply over time. So, it's better to save gradually now than to wait a few years and put aside a large sum."

To determine your current ability to save, consider your average annual savings. Then distribute that amount throughout the year instead of aiming for one large contribution.

Example: Over the past three years, you've contributed $5,000, $8,000, and $6,000 respectively to a registered retirement savings plan (RRSP), for an annual average of $6,333. So, a realistic saving goal for you would be to save $122 per week.

Prepare for tax season

"If you put aside at least 30% of your net income, you'll have enough to pay your taxes and contribute to your RRSP," says Laflamme. "And if there's any money left over, it becomes forced savings."

In general, Geneviève Millette suggests that her clients routinely put 40% of their net income (revenues minus expenses) into a savings account for the purpose of paying taxes and job-related costs.

The percent you should set aside depends on several factors, including your income and expenses. Receiving personalized advice from an expert, like a tax specialist or accountant, can be very helpful.

Plan your finances and savings

"Once you've mastered the business side of your finances, set a budget, and adopted financial tracking tools, you'll find it easier to save for your retirement or personal goals," says Millette.

For Luba, the main purpose of saving is to have peace of mind in the short term and the ability to tackle future projects in the long term. "I have a savings account and a TFSA, which I contribute to monthly. My strategy is to cover my expenses, which are pretty much the same every month, and save the rest."

There are as many saving strategies as there are workers. The important thing is to find what best suits your needs and reality.

"Many self-employed individuals—especially those just starting out—need liquidity, which can be an issue. It makes automatic saving more difficult," says Millette. "If you're in this boat, start by building a financial cushion. Then, you can automate your savings while knowing you have the means to get through possible slow periods."

Saving as a couple

Julie admits that her personal situation has greatly influenced her professional decisions. "My spouse has a steady job and good working conditions. So, for our retirement, we decided that he'd contribute to an RRSP on my behalf. His steady income compensates for my fluctuating revenues, which are never guaranteed. Since we have children, having that stability is reassuring. We also look for concrete projects that will encourage us to save, like buying an office for my private practice."

Saving together can be a very beneficial strategy for couples. "If one spouse earns significantly more than the other, the higher-income spouse can contribute to their partner's RRSP. It's known as a change of ownership. Once a few years have passed, those RRSP contributions become part of the lower-income spouse's taxable income," says Millette.

What to do when you can't save?

Finally, keep in mind that your savings are based on your income and expenses. However, there are tricks that can help you accumulate surplus and save. Making a budget to determine your expenses is a good first step. Can any be eliminated or reduced? In terms of income, do you anticipate any other sources of revenue, like a tax refund? You can also boost your income without increasing your salary. Saving requires a conscious effort, but it's often simpler than you think!

When it comes to saving, make sure your goals are realistic. Accept that a lower income may also mean lower savings. You can always adjust your automatic saving contributions, because putting money aside should be easy—not an extra source of financial stress! Don't hesitate to speak with a personal finance specialist for personalized advice.

*To preserve anonymity, this name has been changed.

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