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Automating Investing with an Unpredictable Income

A reader writes in, asking:

“For most of my adult life, I have made automatic contributions to my IRA or retirement plan at work. Pay yourself first as they say. But now I have a job with unpredictable income. Do you have suggestions for automating investing in such circumstances?”

Because my wife and I are both self-employed, we have an unpredictable income as well. The reality is that, if your income varies significantly from one period to the next, you cannot truly automate your investing — otherwise, at some point, you’ll end up investing more than you can really afford to invest. (Or, to avoid that, you’ll lowball the automatic investment amount, such that you’ll still need to make manual contributions in order to meet your goals, which largely defeats the purpose of automated investing.)

Because we cannot automate the contributions themselves, what has worked for us is to come as close as possible to having an automated process. Specifically:

  • Having a regular schedule for making retirement account contributions, and
  • Having a precisely-defined way to calculate how much we can invest, so that we’re not just making it up each month.

Have a Regular Schedule

It is helpful to have a specific day on which you will calculate and make your contribution each month. For us, it’s the day after the day on which we get paid by Amazon (Amazon being our largest source of income). By picking the day immediately after our largest source of income shows up, we come as close as possible to the “pay yourself first” idea — investing money before we get the chance to spend it.

Creating an automatic reminder email in Google Calendar (or other similar application) can be helpful to make sure you don’t forget.

Know How to Calculate Your Contribution

The other important part of the process is to know exactly how to calculate the amount you can invest. To do that, you first need to know exactly how much you want to leave uninvested (e.g., for an emergency fund plus regular operating expenses).

We have an Excel spreadsheet that we use to calculate our currently-available uninvested money. That is, it calculates the sum of our checking account balances and other safe, liquid sources of money, if applicable (e.g., savings accounts). Then it subtracts each of the following:

  • Credit card balances (we pay them off every month of course, but because the payoff dates don’t coincide with the date on which we calculate and make our retirement account contributions, there are balances that we need to account for at that time),
  • Current estimate of tax liability accrued year-to-date. Early in the year, for lack of any better information, I base the estimate on last year’s tax. For example, in February, the amount used in the calculation would be 2/12 of last year’s total tax figure. In March it will be 3/12 of that amount. In April, it will be 4/12 of that amount, minus the estimated tax payment we will have made by that point.
  • Any other significant expected liabilities that wouldn’t fall under normal monthly spending (e.g., a trip, if we’re currently planning one).

We then compare the total to the target amount to see how much we can invest. Then we make our retirement account contributions accordingly.

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