You will set up the accounts and transfers for your base-pay system and test it on past income.
You have a base pay figure from lesson 1.2 and an account plan from lesson 1.3. Before you set up a single transfer, you want to know one thing: would this system have survived the year you just had? A back test answers that. You run last year's real income through the system on paper and watch the holding account month by month. If it would have gone below zero, you find out now, at a desk, instead of in a thin month with rent due.
This exercise takes about thirty minutes. You need your twelve months of income, your base pay, your business costs and the 15% placeholder for tax and MediSave, or your own figure if you already have one.
Use what you already have where you can. An old savings account you rarely touch can become the holding account. A second savings account or a sub-account in your banking app can become the tax and MediSave pot. Your existing everyday account stays as your personal account.
Rename each one after its job: Holding, Tax and MediSave, Salary. If you want a business costs account, add it now. Check whether any of these accounts charges a fall-below fee, because a fee that bites in a lean month is the last thing the system needs.
Make a table with one row per month and five columns: income received, tax and MediSave share, business costs, base pay, and holding account balance at month end.
For each month, start with the previous balance, add the income, take off the pot share, the costs and the base pay, and write down what is left. Then look down the last column for the lowest figure.
Here is Mei's back test, with figures made up for the example. Her base pay is S$2,300, her business costs are S$300 a month, and she uses the 15% placeholder. Her year started with two quiet months, S$2,900 in January and S$3,400 in February.
Starting from an empty holding account, January leaves her S$2,900 minus S$435 for the pot, minus S$300 of costs, which is S$2,165. Paying herself S$2,300 takes the balance to minus S$135. February brings S$3,400, which leaves S$2,590 after the pot and costs, and after base pay the balance climbs back to S$155. From March the big months arrive, and the balance never looks back. By December it reaches S$21,160.
So the system works over the year, but it would have failed in the very first month. That is common. A back test that starts in a quiet month is the hardest test, and it is worth knowing.
If your lowest balance is below zero, you have two choices.
You can lower base pay until the lowest balance is at least zero. For Mei that would mean a base pay of about S$2,165, which falls below her essential spending of S$2,200. That route does not work for her.
Or you can build the buffer first. Before switching to base pay, she leaves one month of base pay, S$2,300, sitting in the holding account as a starting balance. Rerun with that start and her lowest month-end balance is S$2,165 in January, and the year ends at S$23,460. She can either wait for a good month to fill that starting balance, or move existing savings in to seed it.
Choose the route that keeps base pay above your essential spending. If neither route works, your numbers are telling you what lesson 1.2 described: the fix lies in price, volume or costs, and the back test has shown you that before it cost you anything.
Two things make the system run without willpower.
Set a standing transfer from the holding account to your personal account for base pay, on a fixed date each month. Pick a date a few days after most of your clients usually pay, so the transfer rarely lands on an empty account.
Then set up a habit for the pot. Most banks cannot move a percentage of each incoming payment automatically, so make it a rule: when a payment notification arrives, move the share to the pot that day. Some people set a weekly reminder to catch any they missed. Either works, as long as the share moves before you think of that money as available.
When you finish, you have three or four renamed accounts and one table. The table shows twelve months of past income, your base pay, the pot share and costs for each month, and the month-end holding account balance. At the top, write three figures: your chosen base pay, any starting balance you need, and the lowest balance the holding account would have reached.
Mei's sheet reads: base pay S$2,300, starting balance S$2,300, lowest balance S$2,165. One look tells her the system would have carried her through last year with no month at zero, and that is the confidence you are after before you switch on the standing transfer. Work through the worksheet in the activity with your own year.
Complete the base-pay worksheet with twelve months of past income, your chosen base pay and the lowest holding account balance it would have reached.
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