You will be able to choose a base pay figure that your income history can support.
You have twelve numbers on a page now, one for each month, with the three lowest marked. Most people look at that page and feel one of two things. Either the good months look so good that a generous salary seems obvious, or the bad months look so bad that a steady salary seems out of reach, and both reactions lead to the wrong figure. This lesson turns the page into one figure you can live on.
Meet Mei, who will appear through the rest of this module. She is 33 and works as a freelance graphic designer for agencies and small businesses. All her figures here are made up for the example, but the shape of them is typical of design work: a few big months when a campaign lands, and quiet months in between.
Mei's client payments last year ranged from S$2,900 in her worst month to S$8,200 in her best. Those are gross figures, and none of them is money she can safely live on in full.
Two things come off first. The first is business costs: software subscriptions, a share of her phone bill, transport to client meetings and printing. They average about S$300 a month for her. The second is tax and MediSave. As lesson 1.1 explained, nobody deducts these for a self-employed person, and the bills arrive long after the money. Until module 2 gives her a proper figure, Mei uses a placeholder of 15% of every payment for her tax and MediSave pot. That placeholder is a starting guess, and lesson 2.4 shows you how to replace yours with a calculated one.
So for each month, Mei works out what is left: gross payment, minus 15% for the pot, minus S$300 of costs. In her best month that leaves S$6,670. In her worst it leaves S$2,165.
Do the same for your own twelve months before you go further. Setting base pay from gross income is the most common mistake in this method, because it quietly spends money that already belongs to the tax and MediSave bills.
Now look at the three lowest months after those deductions. Mei's are S$2,165, S$2,335 and S$2,505. Their average is S$2,335.
That average is your first base pay figure. It is close to what you earn when work is thin, which means most months will bring in more than you pay yourself. The extra stays in the holding account and builds the buffer that carries you through the next thin month. If you used your average month instead, about half your months would fall short, and the buffer would never get a chance to grow.
Mei rounds her figure down to S$2,300. Rounding down gives her a little more room, and a round number is easier to set up as a standing transfer.
If you are new to freelancing and have fewer than twelve months of history, use what you have, add your honest estimate for the rest, and lean lower. A first base pay figure is easy to raise later and painful to cut.
A base pay figure is only useful if you can live on it. Take your essential spending, the costs you would still pay in a bad month after cutting everything you could. Lesson 3.1 of The Singapore personal finance system, How big your emergency fund should be, shows how to build that figure from your cash flow statement: rent or housing loan, utilities, insurance premiums, basic food and transport, loan repayments and money you give your family.
Mei's essential spending is S$2,200 a month. Her base pay of S$2,300 covers it with S$100 to spare. It is tight, and her eating out and holidays have to fit inside that S$100 plus whatever she trims elsewhere, though the sum does work.
Sometimes the lean-month figure comes out below essential spending. Say your lowest months leave S$1,800 and your essentials are S$2,400. The tempting response is to set base pay at S$2,400 anyway and hope the good months make up the difference.
That only moves the problem. A salary the business cannot support drains the holding account, and you find out in the worst way, in a thin month with nothing behind you. The honest reading is that the business does not yet earn enough in its lean months to pay for your life. There are three ways to change that: charge more, take on more work, or spend less on running the business. Module 7 deals with pricing directly, and the quarterly routine in module 8 is where you track whether the fix is working. Lowering your essential spending is a fourth route, and lesson 2.2 of The Singapore personal finance system, Set a spending plan from your real numbers, covers it.
Until one of those changes, set base pay at what the lean months can support, cover the gap from savings for a short, planned period, and write down the date you will review it.
Base pay is not set once and forgotten. Review it twice a year. Raise it only when the holding account has stayed above its target for the whole period since your last review, not after a single good month. A big invoice in March tells you about March. Six months of a rising balance tells you about your business.
When you do raise it, raise it by a modest step, such as S$100 or S$200, and watch the next quarter before moving again. Lesson 1.3 sets out what that target balance is.
You now have what you need for the activity: your lean-month figure, rounded to something you can transfer, sitting beside the essential spending it has to cover. Put the two numbers next to each other and look at how much room lies between them.
Calculate a base pay figure from your income history and write it next to your essential monthly spending.
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