Servicemembers who transition or retire from active duty may be concerned about job opportunities, especially in our current economic climate. Many also are concerned about building financial stability beyond the military pay scale. If your career path leads you to a field such as sales, consulting or independent contracting, with an income that fluctuates from month to month, you can still create a strong savings plan.
Any of these career paths — or a spouse's part-time employment — may make it challenging to predict how much you earn each month. People whose income fluctuates must adopt a long-term view of finances than someone with a regular paycheck coming in. The good news is that if you've spent years learning the ins and outs of military pay and allowances, you likely have the tools to manage an up-and-down civilian income.
Use these tips to arm yourself to develop a routine savings plan on an irregular income:
1. Plan for taxes. Self-employed individuals must pay quarterly estimated U.S. income taxes, and in most cases, state and perhaps local taxes, too. If you do not pay on time, you will face penalties. Consult the IRS website or a tax advisor to estimate how much you must pay. Then establish your bottom line — the amount you must save to make those quarterly payments. Set aside 1/12 of the annual total each month, or save a percentage of every payment received (25 percent to 30 percent often works) to cover the taxes.
2. Build an emergency fund. Experts recommend savings that could cover six to nine months of expenses. If you save conservatively for known quantities, such as taxes, you'll likely build more funds than you need. This fund can become a "floating" fund to pull from during leaner times, then replenish when income increases.
3. Sock away windfalls. When you earn or receive extra money (from a larger client check, a gift or activities such as a yard sale), save rather than spend the excess money. Once you're used to living on your budget, chances are you'll actually feel more comfortable if you stick to that budget. If you stash the extra — in addition to the regular pre-determined amount — your savings will soar.
4. Establish a baseline. Generally, after a year or more of fluctuation, people can observe patterns of activity — for instance, a slump around the holidays or in the summer — as well as determine a typical monthly minimum income level. Then budgeting, spending and saving can be done with that base in mind.
5. Bill yourself. Set up your own automatic deduction plans. Some financial institutions let you arrange automatic withdrawal from your checking account to a savings account. Record this expense like a bill every month to painlessly accumulate savings. If necessary, start with a small amount, such as $25 or $50 per month, and increase it whenever possible. For instance, when you pay off a credit card with a $50 monthly payment, increase your savings by that $50. With the same outflow you have today, you'll be paying yourself.
6. Save like a pro. Don't just keep savings in your spending account with a mental note that they're "saved." Instead, put them in an investment or savings vehicle you've selected. For savings, you don't want to be tied up for the long term you may choose a money market account that allows withdrawals only at certain minimum levels. You could also buy short-term CDs (three- or six-month terms) that provide some interest earnings and force you to constantly re-invest.
Whatever strategy you choose, do save something. You'll be inspired by the way your funds accumulate — and then you'll be well on your way to financial security, whatever your income is in any given month.
For more tips on saving during tough economic times, visit Military.com's Finance channel.
