Many of our clients work for themselves or are considered 1099 employees at their firms and have inconsistent income. Some take pay quarterly, some work on contingency and may have no income for months, and others get paid as commissions come in. For any of these folks, managing cash flow can be a nightmare. This month we share some tips from Sybil Verch, host of The Wealthy Life that can definitely help when pay is irregular at best.
When it comes to managing cash flow and saving for goals we know that having regular income can even prove challenging. But when pay is irregular, as it is for many of my attorney and entrepreneur clients, it is incredibly hard to manage finances. The feast and famine of cash flow often makes denial the easiest strategy. We’ve seen it lead to high consumer debt, create added stress, and affect relationships. Below we share tips from Sybil that we believe can truly help:
Sybil’s 5 Tips to Smoothing out Irregular Income:
1. KEEP PERSONAL AND BUSINESS FINANCES SEPARATE
Keeping track of business related expenses will help you at tax time as many of those expenses are likely deductible. It was also help you understand what you need to live on personally versus what you need to spend to generate business income. This will prevent you from asking “where does all my money go?” and will make you feel more in control of your finances.
2. MAKE SURE YOU SPEND LESS THAN YOU EARN AND SAVE THE REST FOR GOALS
Separate your monthly expenses into Fixed and Discretionary, to figure out your monthly cost of living. Let’s say this is $7,500/month. If you average $10,000/month of income, put aside that extra $2,500 towards your goals (retirement, vacation, emergency fund, etc.)in an account dedicated to that goal. If you’d like a copy of our Budget Worksheet to help you determine what your monthly expenses, please shoot us an email.
3. CREATE AN EMERGENCY FUND OF 3-6 MONTHS
If you can’t count on consistent income, it is especially important to have an emergency fund. For couples where both are employed we usually suggest saving at least three months of fixed expenses, but if you are single err on the side of more. Six months of fixed expenses should be set aside so that when income lags your financial needs you can avoid stress by having a back-up plan. You’ll want to replenish what you take from here later when you are paid.
4. SET ASIDE AND INVEST MONEY FOR RETIREMENT
Use the power of compounding over time to grow your wealth; the sooner you start the better. Aim to save at least 10% of your income.
5. HAVE AN ACCOUNT DEDICATED FOR YOUR TAXES
Most of my clients pay quarterly estimated taxes, but with irregular income they may not have the money to pay taxes when they are due. Rather than face penalties for late payments and incur the stress of trying to catch up, get in front of these taxes by having a dedicated tax account. Set up a savings account dedicated to taxes and when pay comes in fund this account first. It will allow you to stay ahead of taxes, rather than try to make up for a large sum right before tax time. This is one of the stress points we see often with our clients, so having an account that you fund throughout the year for this will help.
We know how challenging managing your money can be when income is sporadic, but expenses are not. Taking some of these tips can help get you in control of your financial situation and alleviate the stress that keeps you up at night.
You can learn more about how we help our clients with budgeting and saving for their goals at our website, and in our latest book Corner Office Choices: The Executive Woman’s Guide to Financial Freedom. And to learn more about Sybil Verch and The Wealthy Life, please visit her site.
