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When money fluctuates, however, decisions can feel much harder.
How much should you save or invest?
Which debt should you focus on paying off first?
Whats your budget for eating out or entertainment?
All of these are valid questions when youre unsure of how much youre making.
Heres how tonavigate these shifts effectively.
When Income Decreases
Reassess Your Budget
Salahi advised to immediately review your expenses.
Categorize them into essential and non-essential.
Look for areas to cut back without compromising your quality of life.
The first step is to gain a clear picture of your new financial reality, he explained.
List all your expenses and rank them by necessity.
He said this process often reveals spending habits you werent fully aware of.
I had a client who realized they were spending $300 monthly on subscriptions they rarely used.
Cutting these immediately freed up funds for more critical needs.
Build or Bolster Your Emergency Fund
If you havent already, start an emergency fund.
Aim for 3-6 months of living expenses.
An emergency fund is your financial safety net, said Salahi.
If your income has decreased, have a go at set aside even small amounts regularly.
Diversifying your income streams can provide financial stability during uncertain times.
I advise clients to leverage their skills or hobbies.
Negotiate Bills and Debt
Contact creditors to discuss payment plans or hardship programs.
Many companies offer flexibility if youre proactive, Salahi added.
Its tempting to immediately upgrade your lifestyle when your income increases, he explained.
However, I advise clients to wait at least three months before making any major changes.
This allows you to thoughtfully plan how to allocate the additional funds and avoid impulsive decisions.
If your income increases by 20%, venture to increase your savings by at least 10%.
Pay Down High-Interest Debt
Use extra funds to accelerate debt repayment, focusing on high-interest debts first.
Invest in Yourself
This is a big one.
Salahi recommended considering using some funds for education or skills development to further your career.
Investing in yourself can lead to even greater income potential.
One client used her raise to fund an advanced certification in her field.
Within a year, this led to a promotion that doubled her initial raise.
Higher income often means you’re free to take on more investment risk forpotentially greater returns.
However, he said this should be balanced with your overall financial goals and risk tolerance.
Regular portfolio rebalancing is crucial to maintain an appropriate risk level as your financial situation evolves.
Remember, income changes are often temporary.
Developingadaptable financial habitsand maintaining a long-term perspective will serve you well through various financial seasons.
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