Gails Blog

I was listening to my make-up artist, Natasha, and DOP, Adam, talking about how to manage their variable incomes. Adam is a freelancer and always has to be sure he’s got a cushion in case the bottom falls out of the camera-guy-world. Tasha is starting her own business – she a terrific clothing designer. They both have to deal with unreliable incomes and all the stress that goes with.

Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast-Today-Fast-Tomorrow Syndrome.  One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the 30th without racking your cards to the max.

Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you NEED and the things you WANT. You have to have a PLAN.

First, you need to set your salary and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time.

Smooth out your cash flow by deciding what your minimum monthly income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, you’ll only transfer this amount into your Household Account for spending. The rest stays in your Biz Account. Then, in a month when you haven’t billed as much as normal, you’ll still have a whack of cash in the Biz Account so you can transfer your Salary to your Household Account.

To figure out your Salary, do up a budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The we-can-live-without-it items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. And don’t forget taxes. Your second-tier budget needs like home maintenance, clothes, entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories get going!

Now you could have a big fat monthly total if you’ve weighed yourself down with big fixed expenses - like that $800 a month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. But I’m going to assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)

Next, you need to build up your just-in-case fund. The standard recommendation for an emergency fund is to have three months’ income or six months’ worth of essential expenses covered. Aside from the typical reasons to tap into your emergency fund — to pay for a car breakdown, unexpected home repairs or a root canal — you also may need to dip into it in when you’ve gone a few months with no work and have run out of money in your Biz Account.

I use the term “run out of money” advisedly. You should never have NO MONEY in your Biz Account, since the business itself has overheads you must cover: telephone costs, car payments, equipment lease costs, and the like. You should always maintain a minimum of six months’ worth of business expenses -– your Business Buffer — in your Biz Account. When you drop to that amount, you stop pulling your Salary so the business can stay afloat. That’s when your personal emergency fund will really pay off.

Remember you also have to save for the future. Since you’re self-employed, if you’re not socking away retirement savings, you’ll have a pittance when the time comes to stop working. Estimate that you’ll need 70-80% of your current income each year in retirement to set your retirement nest-egg goal.

When business isn’t booming, resist the urge to cut back on savings. Cut back on spending, but keep your savings intact since you will need them later. And stash the amount you’ve decided to save in a retirement account monthly using an automatic deduction.

Make sure you also fill the gaps in your safety net. As a self-employed person, you need to have both disability and (if you have dependents) life insurance. Base the amount of insurance you buy on what it’ll take to cover your basic expenses, keeping in mind that some disability policies replace only up to 60% or 70% of your earnings per year.

Use gravy for other goals. Whatever you have in your Biz Account — your Business Buffer and earnings beyond your Salary – should be invested in a high-yield account.  If you’re doing very well financially, you can now decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree.) Build or replenish your emergency fund if you’ve dipped in, and pay down your debt.  But you should also have some fun.

Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years – some lean, some luxurious. And I wouldn’t swap for one minute the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about six months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a LOT of money. And a good thing too. Because when it came time to have my kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?

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