People talk about establishing several income streams to increase net household income, pay off debt, and build a safety net for hard times. I certainly have advocated that more than once, because I’ve done it and it’s worked well for me. A small, unsteady income from freelance editing combined with taking on a few courses at the Great Desert University and then at a community college earned enough to pay off the second mortgage on my house, leaving my house free and clear before I was laid off, and helped establish a $14,500 emergency fund, which, in a pinch, would cover a year’s worth of living expenses.
So…how did I manage to cobble that much together, when I certainly didn’t net $35,900 ($21,400 went to pay off the loan) in those two semesters of part-time teaching?
Well, you’ve heard of snowflaking, whereby we put every little windfall and every extra few pennies toward debt? I think of this as snowmelt into savings streams. For some years before I was laid off, I had several savings streams:
• One was a regular credit-union share savings account, into which I put a base amount of $200 a month. In addition, I also deposited any windfalls in here: the annual American Express card rebate, manufacturers’ rebates, gifts, whatever. In palmier days, come to think of it, I usually put the AMEX rebate into a Roth IRA, but that’s another story.
• Another was a money market savings account, into which I put everything I netted off sidestream jobs—teaching and freelancing—plus any other windfalls that came my way. This was the primary savings for the loan payoff.
• A third was a money market checking account. Each month as paychecks came in I moved $1,500 here, to cover the $1,500 a month I budgeted for credit-card spending. This represented discretionary spending, as opposed to monthly bills that have to be paid come hell or high water. Usually, I spent significantly less than this. Any money that was left over stayed in money market checking.
• A fourth was another share savings account at the credit union. It held a monthly $325 self-escrow to pay annual property taxes, homeowner’s insurance, and auto insurance.
• And a fifth savings stream was a Vanguard Prime Money Market Fund, into which I put 30% of all freelance income—a set-aside to pay income taxes and my tax preparer.
Three of the five monthly “snowmelts” happened as automatic transfers: on the first of the month, $1,500 was moved to money market checking to cover discretionary expenses; on the last, $200 went to monthly savings and $325 went to tax & insurance savings. Instead of “paying myself first,” I kept that $525 in my primary checking account until the last of the month to ensure that no checks would bounce. They never did. But in Quicken I deducted the amount from the bottom line, so I would always know what was left in the account with those savings streams flowing out.
In other words, what I left in checking from each month’s pay was only enough to cover monthly nondiscretionary expenses. Funds for costs over which I had some real, credible control were paid from the credit card budget, which flowed into an account specifically to pay off the card in full each month.
Because the discretionary budget is based on summer expenses, which are about $300 higher than late fall, winter, and early spring costs, over time quite a bit of leftover money quietly accumulated in regular checking, just as it was quietly accumulating in the discretionary spending account (because I rarely used all my discretionary budget).
It’s surprising how much money accrues—and how painlessly it accrues—when you make savings streams a part of your financial life. When I was finally laid off last December, I was pleased to find something over $28,000 lurking in the credit union. That was after the second mortgage was paid.
Admittedly, a credit union or bank account is not the best place to stash 28 grand. I simply hadn’t registered how much had accrued in the various accounts that I wasn’t deliberately using as savings accounts. When you added the serendipitous savings that resulted from living within my means to the deliberate savings, it came to quite a lot. I moved $14,000 to investments and kept $14,500 as this year’s “cushion,” knowing that with Social Security’s stringent earned-income limit, 2010 would be tight.
Although 2010 is tight, I still haven’t lost the savings-stream habit. In semiretirement, I no longer feel the need to save as much—largely because I no longer live in fear of layoffs. And restructuring The Copyeditor’s Desk from a sole proprietorship to an S-corporation changed its tax structure, so I don’t have to set aside a chunk of dough to cover taxes on freelance enterprises.
• I’m now keeping all budgeted spending money—discretionary as well as nondiscretionary—in my primary checking account. Because I’ve undershot both budgets all winter…uhm, well…ahem…until the great Shopping Spree Episode…about $2,100 extra has accrued in there. So it’s a de facto savings account, although I expect to spend that money over the summer, when teaching income dries up.
• Regular monthly savings still gets its $200/month deposit, plus all other small windfalls. As a matter of fact, this is where the $700 to cover the clothing frenzy will come from. With over 14 grand sitting in checking as a gigantic emergency fund, the regular monthly savings account, which I used to regard as “emergency” savings, is now a diddle-it-away fund.
• Another $325 still goes into the self-escrow account each month. Taxes and insurance being unavoidable, that one’s not an option. Starting this month, I’ll add another $90/month to that, to cover the annual cost of Medigap insurance.
• The corporate account now collects all freelance and blogging income. With an S-corporation, you pay yourself a salary, which can be fairly modest as long as it recompenses you reasonably for the work you do as the corporation’s director (which ain’t much). The money that remains in the corporation can be used to cover your incorporated enterprise’s operating expenses (such as computer equipment, office supplies, server space). Money that you draw out after you’ve been paid your salary is treated as dividend income. To date, I haven’t needed any of that money to live on. So, the corporate account also functions as a de facto savings account.
Even though I’m now unemployed (or, we might say, “underemployed”…in a big way), with a total gross income of about 58% of what I earned at the Great Desert University, money is still flowing through four income streams (teaching, Social Security, a small pension drawdown, and the incorporated freelance enterprise) into three formal savings streams (tax & insurance, regular monthly savings, and the corporate account) plus an informal savings stream in the form of unspent cash in regular checking.
Savings streams ensure that there’ll always be enough to cover those ugly recurring tax and insurance bills, plus something to pay for the occasional indulgence. Consequently, my lifestyle has really not changed much, despite the 42 percent cut in income. Thanks to a few small income streams and savings streams.