Pick a base pay figure that your income history can actually support.
Mei is 33 and works as a freelance graphic designer for agencies and small businesses. She appears through the rest of this module. Her figures are made up, but they follow the usual pattern of design work, with a few big months when a campaign lands and quiet months in between. Last year her gross client payments ranged from S$2,900 in her worst month to S$8,200 in her best. She needs to turn that spread into one steady monthly amount she can live on, and so do you.
You already have your own twelve monthly income figures on a page, with the three lowest marked. People looking at that page usually react in one of two ways. The good months make a generous salary look obvious, or the bad months make a steady salary look out of reach. Both reactions lead to the wrong figure, so the method below works only from the numbers.
You cannot safely live on the full amount clients pay you. Two things come off it before anything else: your business costs, and tax and MediSave.
Business costs are what it takes to run the work, such as software subscriptions, a share of the phone bill, transport to client meetings and printing. Mei's come to about S$300 a month on average.
Tax and MediSave need their own money because, for most work, nobody deducts them for a self-employed person, and the bills arrive long after the money. The exception is work for a government agency. When you give a government agency a contract for service, you are automatically enrolled in Contribute-As-You-Earn (CAYE), and when you are paid, a portion of your fee goes straight into your MediSave Account. CPF Board's CAYE page explains how it works. Lesson 1.1 explained this. Module 2 gives you a proper figure for the tax and MediSave pot, which is the money you set aside from every payment for those bills. Until then, set aside a placeholder percentage of every payment. Mei uses 15%. The placeholder is only a starting guess, and Lesson 2.4 shows how to replace it with a calculated figure.
For each of the twelve months, take the gross payment, subtract the placeholder percentage, then subtract your average monthly business costs. What is left is that month's net. For Mei, S$8,200 minus 15% minus S$300 leaves S$6,670 in her best month, and S$2,900 minus 15% minus S$300 leaves S$2,165 in her worst.
The most common mistake with this method is setting base pay from gross income. It quietly spends money that already belongs to the tax and MediSave bills.
Base pay is the fixed monthly amount you pay yourself from the holding account. To set your first figure, find the three lowest months after deductions and average them. Mei's three lowest net months are S$2,165, S$2,335 and S$2,505, which average S$2,335.
This figure is close to what you earn when work is thin, so most months 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 the average month instead, about half of all months would fall short and the buffer would never get a chance to grow.
Round the figure down. Rounding down leaves a little more room, and a round number is easier to set up as a standing transfer. Mei rounds S$2,335 down to a base pay of S$2,300.
If you are new to freelancing and have fewer than twelve months of history, use the months you have, add an 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. Compare it with your essential spending, which is the costs you would still pay in a bad month after cutting everything you could. That covers:
rent or housing loan utilities insurance premiums basic food and transport loan repayments money given to family
You build this figure from your cash flow statement. Lesson 3.1 of The Singapore personal finance system, "How big your emergency fund should be", shows how.
Mei's essential spending is S$2,200 a month, so her base pay of S$2,300 covers it with S$100 to spare. It is tight. Eating out and holidays have to fit inside that S$100 plus whatever she trims elsewhere, but the sum works.
Say your lowest months leave S$1,800 and your essentials are S$2,400. It is tempting to set base pay at S$2,400 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. You can fix that through the business in three ways: charge more, take on more work, or spend less on running the business. Module 7 deals with pricing directly. A fourth route is to lower your essential spending, which Lesson 2.2 of The Singapore personal finance system, "Set a spending plan from your real numbers", covers.
Until one of those changes, set base pay at what the lean months can support and cover the gap from savings for a short, planned period. Write down the date you will review it. The quarterly routine in Module 8 is where you track whether the fix is working.
You don't set base pay once and forget it. Review it twice a year. Raise it only when the holding account has stayed above its target for the whole period since the last review. Lesson 1.3 sets out that target balance. A single good month does not count: a big invoice in March tells you about March only, while six months of a rising balance tells you about the business.
When you do raise it, move in modest steps such as S$100 or S$200, then watch the next quarter before moving again.
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.
Work out a base pay figure from your income history and write it beside your basic monthly spending.
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