If you want a reason to lie awake nights and worry about money, just choose a career where your earnings come in unpredictable boom-and-bust cycles. Having spent years selling real estate, I’m familiar with the financial roller coaster that can go along with selling big-ticket items.
There are plenty of other careers, as well, that don’t necessarily provide a reliable month-to-month income: farming and ranching, music, writing, tourism, construction, and consulting. And, as one of my staff members with a bronc-riding husband would remind me, professional rodeo. Plus in today’s economy, increasing numbers of people are relying on temporary contracts and projects.
Another form of unpredictable income is a field such as professional athletics. There’s a chance to earn big money, but the career typically won’t last long and could be abruptly cut short by an injury.
Here are some suggestions for managing an irregular income:
1. Base your lifestyle on your lean times instead of your fat times. When you’re starting out, live on as little as you possibly can and focus on building a reserve.
2. Average out your yearly income and give yourself regular monthly paychecks. As your career progresses, pay yourself a monthly salary based on your average income for the previous three years. This allows you to give yourself raises as you become more successful, but those raises are based on real numbers instead of anticipated income.
3. Keep building your reserve. A generous emergency fund is important. As you accumulate an investment portfolio, keep a substantial amount in more liquid assets like cash, CD’s, and bonds. Don’t diversify into less liquid investments like stocks and real estate investment trusts until you have a large reserve built up.
4. When you bring home a fat paycheck, resist the urge to declare a dividend and go on a spending spree. Give yourself a small percentage as a reward, enjoy a modest celebration, and sock the rest away.
5. From the beginning, take amounts for taxes, savings, and retirement funding off the top of every check in both good times and hard times. Don’t fall into the trap of relying on that next big paycheck to take care of your Social Security and income taxes or your retirement plan contribution.
6. Invest some time and energy in becoming familiar with your unconscious beliefs about money. Guilt over doing better than your family, for example, may cause you to give inappropriately expensive gifts or take on financial obligations you can’t sustain. If you feel a need to keep up with others in your field who have lavish lifestyles, you could blow a fortune and be left with nothing but debt.
7. It may be a good idea to have your earnings come to an LLC or other entity that then pays you a salary. Consult an accountant or fee-only financial planner to help you decide what works best for you.
8. Think beyond the payment in your hand. It’s easy—and very normal—to receive a fat check and think, “I’m rich!” Yet, in the case of a high-earning but short-lived career, that check may be a disproportionately high percentage of your overall career earnings. In other fields such as sales or consulting, a check may represent months of earnings, and you may not see the next one for several more months.
Perhaps the most essential factor in managing an irregular income is to learn to think into the future. Instead of letting your spirits and your spending rise and fall with your income, it’s vital to think long-term and focus on your career rather than your paycheck.