Planning With An Up & Down Income

Please head over to Iseler financial.com/podcast to submit your question and I'll answer it in a future episode. Today I want to talk about one of the most consistent problems faced by both my clients and myself: how do you make financial plans for the future when you have an up and down income? Whether you're a musician, writer, artist, freelancer, or small business owner, it's really hard to anticipate what your income will be from one month to the next to say nothing of the rest of the year.

And that holds back a lot of people who want to plan for the future, but don't really have a great answer for how much do you make every year? So what should you do if you have an unpredictable income and also want to plan for a better life? The good news is if you know that something will happen, even when that something in question is uncertainty, you can make a plan for it. Let me say that again in a different way because it's an important point.

If you know that something is unpredictable, but unavoidable, you can plan for it. Here's an example. I know that at some point during the entire rest of my life, I will need to go to the hospital for something serious. I hope it's not soon, but I know that it'll happen sometime.

And because I know it's a matter of when and not if I can plan for it using a combination of health insurance, emergency savings, and regular check-ins with my doctor to hopefully identify problems before they get too big. Here's another example. At some point in the future, I will be driving in my car and get caught in the rain. I don't know when, I don't know where, but I know it will happen. So I keep an umbrella in my car.

Super simple, super low tech, but it's a plan for something unpredictable that I know will happen. So an unpredictable, but unavoidable circumstance is something that you can plan for, right? If you know that you can't count on a steady income, then you can plan for that. It's true that the plan might not be as neat and tidy as a plan for something with a high degree of predictability, but that shouldn't hold you back from getting started.

Here are three great ways that anyone with a lumpy income can plan for the future. The first thing you need to do is understand how much you spend each month.

Even if you can't predict your income, you could still get a handle on how much you spend, and you can reverse engineer that to come up with all kinds of other info, like how much money you need in your checking account to cover next month's bills, or how much you should keep in cash at all times for emergencies, and when you can take on extra expenses like a car or a home loan. There are lots of ways to figure out how much you spend each month, including budgets and expense tracking tools.

But you can also just look at the statements from your bank accounts for the last three months, add up the total of all the money that went out, and then divide by three. Now you have a reference for how much you need in the old checking account to cover expenses each month, and having a pretty good idea of your average monthly spending is an essential first step to making any kind of a plan.

If you choose to go this route, I would suggest repeating this process two or three or four times a year so that your average gets more and more accurate. The second way that you can plan for an unpredictable income is to keep enough cash on the sidelines to get you through several months. This is important for anyone, but people with up and down incomes need to really prioritize a cushion of at least six months worth of expenses.

See above in case you need help getting through a few lean months. And if you're especially cautious, an emergency fund of 12 months worth of expenses or more, might help you sleep better at night. And one benefit of knowing how much cash you wanna keep for emergencies is that you also know when you have extra money that you can invest for your future. Again, it's not as neat and tidy as someone working a straight job with a 401k.

But it's still a way to plan for the future with an up and down income. Here's one thing that I see a lot with creatives and self-employed people. Because there is so much risk and uncertainty involved with how they make money, there can be a tendency to move the goalposts once a reasonable cash reserve has been built up. Like once you get six months worth of expenses set aside, you might think, yeah, but what if something else goes wrong and I need even more money? I totally get it.

That money is hard earned and it's difficult to let go of it when you don't know what your future income will be. I personally think that somewhere between six and 12 months worth of expenses is a great emergency fund target for people with irregular incomes, but some people want more security than that.

If you're one of those super cautious people, what I really want you to do is to define in advance the amount of cash that will make you feel like you have enough, have a reason for why you came up with that number that you can clearly articulate, and then stick with it. For real, don't move the goalpost once you hit that number. If it takes a hundred K in the bank for you to feel good, that's fine.

But I want you to be able to explain why that number is right for you and then when you reach that amount, be willing to put any extra money to work for you by investing it. one more thing that I want to throw in here. We usually talk about dedicated cash reserves in terms of emergency funds, but you can also think of it as an opportunity fund. How awesome would it be if there was an opportunity to take a once in a lifetime trip and you knew you had the money in the bank to make it happen?

Or if a perfect work opportunity comes up that requires you to miss a couple of months income for whatever reason. And you know you have that covered. Keeping a lot of cash in a savings account helps you manage emergencies, sure. But it also lets you seize opportunities. Okay. The third thing that people with irregular incomes can do to plan for the future is maintain more access to credit than you actually need.

Everyone should avoid taking on a lot of high interest debt, but this is especially important when you don't know what your income will be from month to month. It's just so much harder to keep on top of debt repayment when your income could drop unexpectedly, but you also want to keep your credit balances in check so that you have plenty of access to quick cash when you need it during a lower income period.

Plus keeping your credit usage low, which is the percentage of total available credit that you're currently using, is good for your credit score in the long term. So I recommend always paying off the balance of your credit card so that you, A, avoid paying any extra interest fees, and B, always have a lot of headroom in case a big expense comes up.

I'd also recommend that once or twice a year you call your credit card companies I and ask if you can increase your credit limit or reduce your interest rate called your annual percentage rate or APR. Either of those will help you out in the event of a sudden large expense. And honestly, it's totally worth the five or 10 minutes it takes you to make the call. Here's a little inside baseball for you when it comes to credit card companies.

It costs them way more money to acquire a new client than to keep an existing one, so they want to keep you happy. Not that you can push them around or whatever, but if you call them and ask for more favorable terms, they're actually pretty happy to check what's available and do what they can. the worst that can happen is they'll say, Nope, you already have the best deal we can give you. And the best is that your credit availability goes up and your potential interest fees go down.

So those are my top three tips for how you can make financial plans with an up and down income. One, know how much you need to spend each month. Two, keep a dedicated cash account of at least six months worth of expenses to help pay for emergencies, unexpected events and opportunities. And three, maintain access to more credit than you need. If you could do those things, you've covered most of the hurdles that prevent people with lumpy incomes from making plans.

Would it be nice if everything about working for yourself was more predictable? Sure. But that's not really part of the deal when you're self-employed. So make lemonade from those lemons by incorporating that uncertainty into your plan for a better life. If you could do the three things I just talked about, you'll be well on your way. All right. I'd love to hear from you about what techniques have helped you build financial stability even with an irregular income.

Fire over an email to podcast@Iselerfinancial.com to let me know what works for you. Next week, I'll be talking with my buddy Matt McCaughan. Matt has been the drummer in Bon Iver since 2008 and has worked with tons of other bands and musicians on stage and in the studio, and he also lives in Durham. and was kind enough to come over to my house to record, which was a first for me. That's it for now. I'll talk to you soon, but first, it's disclosure time.

The Thing We Never Talk About is for educational and entertainment purposes only. It's not legal, investment or tax advice. People on the show, including the host, may have interests for or against any investments discussed. So do yourself a favor and don't make any decisions based on what you hear on this or any podcast. If you have a money or finance question you'd like answered in a future episode, please visit Iseler financial.com/podcast.

Again, that's Iseler financial.com/podcast, and Iseler is spelled I-S-E-L-E-R. If you like what you hear, please like and subscribe to the show wherever you get your podcasts. And you can get my insights on money and more delivered directly to your inbox by subscribing to my Keep It Easy newsletter Iselerfinancial.com/newsletter. Thanks for listening. I appreciate you.