I've been there. It's hard enough to get by on a steady pay cheque, but these days income can get so lumpy: booms and busts, good times and hard ones. Whether it's because of the gig economy and we're freelancing, contracting or whatever we call casual work these days - our earnings can be downright unstable at times.
Many of us can have a significant drop in wages even in the best of economies, according to an excellent report calling for resilience by Deloitte. "Even in relatively benign economic conditions close to one in nine working age New Zealanders will suffer a significant fall in income in any given year." That's a lot of people.
Then there are those unexpected costs that can derail everything, like a speeding ticket or when the fridge has outlasted its repairable life. They're just unpredictable.
All of this makes it tough to keep the lights on, to manage the everyday flow of bills and expenses that modern life brings. It makes planning or investing seem like a faraway dream.
It's time to smooth things out
Spreading out our costs - what's called consumption smoothing - is one way of making things more predictable and manageable. For example, I'm lucky in that our local mechanic lets us pay repairs off a bit at a time instead of all at once. We try not to abuse the privilege and pay the bill off as quickly as possible, but that bit of breathing space just gives us enough time to juggle all the other costs that come in.
What also helps for smooth sailing is evening out our income through saving. It can be a challenge to say the least, but one way is by paying ourselves first - squirrelling away a bit more pay as soon as we get it in order to be ready when a storm hits.
Without savings, we typically turn to debt in a crisis. Throwing a bill on our credit card can be a safety valve, but only in the short run, really. Unless we clear it right away, the cost of that debt will keep dragging at us - and won't go away even when something else unexpected crops up. No one needs a short-term solution that becomes a long-term problem!
Building a buffer is one of the best ways to build our resilience. We can start by aiming to save one month's worth of expenses. When we reach that, the goal should be to build it up to three months or more (depending how lumpy work is). This allows us to take on much bigger challenges like redundancy or a career change.
The more money we set aside, the more options we have when things go pear-shaped.
Flu jabs for the finances
Here are some solutions to our ups and downs in income or expenses:
• Build a buffer. We can start small by paying ourselves first. Heck, if we want to speed things up, there's always selling stuff on Trademe.
• Keep credit free. Clearing our credit cards helps us be ready for anything. And wouldn't it be great if we could keep our emergency borrowing just to a card's interest-free period?
• Smooth out expenses. The trick is to balance out repaying over time without letting things go on too long. Otherwise things pile up in a bigger lump.
• Partner up. Having more than one income can fill the gaps. It might be time to team up with our community, whanau, friends or even (gasp) our partners...
• Get your side hustle on. Work may be more casual these days, but that doesn't have to be a disadvantage. It can also be easier to pick up extra paid work here and there on the side (a "side hustle") in addition to our day jobs. Having more than one source of income really helps resilience.
Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and tools from Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.
