How do we deal with changing income as an effective investor?

Senior Financial Planner Rebecca Pritchard discusses the ways we can still be savvy investors as our income changes course.

The times, they are a-changin’. Many of us don’t have the same consistency in our income we once did and we’re wondering if it is possible to still be an effective investor. Reaching your goals through investing is absolutely possible, with a considered and consistent approach.

Understanding your base case

Knowledge is power, and whilst budgeting may not always be the hottest concept, it’s never been as important as when you’ve got changing income.

During the COVID-19 climate, and more broadly as the workforce moves away towards shorter employment stints and contracts, variable income is becoming increasingly common. A Victorian commission into on-demand working found 24.3% of respondents found income from the gig economy an important part of their overall income. And this is no longer the territory of just the Uber driver, as on-demand work spreads into all professions.

Before you can be an effective investor, you must be effective at managing your cash flow. This means having a strong handle on what’s coming in the door (and how it might vary) and what’s going out. I recommend you understand your “base case”. This means knowing what is your lowest potential (but probable) income during a period (likely over a month or a quarter) and what your non-negotiable expenses are. This will give you the information to stay in the black (where income is more than expenses) or to have enough cash in reserve to fund a period of deficit.

Once you know your base case, you can then consider how you might be able to flex your financial muscles when your earning exceeds this. Does this mean you can be saving (or saving more), investing, spending more? The answer will be dependent on your personal circumstances and goals. This approach will however give you the confidence to whisk that surplus away intentionally, and not absorb it into daily living.

So what does this mean for our investing?

Using flexible investing tools

In decades past, investing in shares meant dealing with only a handful of platforms, or calling up your stockbroker. Transaction costs were high and the energy involved even higher. Today, there are a whole host of investment platforms available that allow for frequent and low cost investing. This is ideal for investors with variable incomes. It means we can invest when we’ve got the cash, but we’re not committed during downtimes. It also means that chunks of our capital aren’t eaten up by transaction costs.

Ready to start your investment journey? Compare online share trading accounts.

If you’ve got room in your base case, it’s fantastic to include a regular savings plan and regular investing plan. This means you’re purchasing investments every month, and you don’t have to put in much (if any) energy. Most platforms will allow you to vary this instruction within a couple of business days, so you can dial up or down as needed. However, for surplus income, or if there’s no room in the base case, ad hoc investments will still do the trick.

To make sure that surplus is getting used wisely, I recommend you add into your calendar a monthly or quarterly review. This will allow you to assess what’s happened in the preceding period, compare it to your game plan, and make a quick call on what you’ve got to work with. This means you can promptly save or invest your surplus, rather than dawdling or trying to juggle the decisions throughout the month. Consistency is key, even if your income isn’t!

Focusing on your goals

So now we know how to dial our investing and saving up and down based on our circumstances, but just because we can, does that mean we should? Knowing what you’re working towards and your priorities as an individual, a couple and/or a family are paramount. This means we can be using our goals as a decision making framework rather than numbers and news headlines.

With market volatility high and companies trading at a discount, it can be a fabulous time to consider investing right now. However, if your goals are imminent or you’re concerned about security and the stability of your livelihood, it’s unlikely that investing is the right call for you at this point in time. Perhaps for you, if you have surplus income, it’s best allocated towards clearing bad debt and boosting your cash buffer, maybe funding your insurances? On the other hand, if you’re confident with your basic standard of living and you’ve got longer term goals (at least three years away), any surplus income can be a great opportunity to boost your investments and pull ahead.

Making peace with the unknown

We’ve all heard the expression “whatever will be, will be”. In this context, it means making peace with a financial landscape that is constantly changing. If your income is changing week to week, or month to month, we cannot wait until it magically resolves itself until we invest or take charge of our money. That day may never come. If we don’t find a way to progress towards our goals regardless, we’re doing ourselves a massive disservice.

If you’ve got variable income, you can still have a budget. If you’ve got variable income, you can still invest, and invest well.


About Rebecca Pritchard 

Rebecca Pritchard is a financial adviser and coach with award-winning financial services practice Rising Tide. After personally experiencing the ground-breaking impact of financial advice in her early 20s, Rebecca transitioned from her career in corporate finance into the financial planning world, and she’s never looked back. As a passionate advocate of financial health, Rebecca brings a decade of experience in financial services to her clients and the community. Reach out to Rebecca and the Rising Tide via risingtidefinancial.com.au and follow @rfpritch.

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