Sa El, 35, says the key to fluctuating income is keeping money from leaking out.
Source: Sal El
Everything has pros and cons.
In return for being your own boss, you give up the soothing, steady drip of regular pay.
That hard-to-predict income is definitely one of the less-desirable things about entrepreneurship.
Fluctuating income is even worse when an unexpected expense crops up, and fewer than half of Americans can come up with $1,000 in an emergency.
To weather a simultaneous income cut and spending spike, people need about six weeks of take-home income, according to J.P. Morgan Chase Institute. The research group found 65% of families don’t have access to this amount of money.
Several strategies are essential, says Sa El, a licensed independent insurance agent and co-founder of Simply Insurance in Atlanta. Not only does El, 35, run his own company, he also works in an industry that can have some built-in unpredictability in the form of chargebacks, which depend on the carrier writing the policy and the agent’s compensation structure. Chargebacks involve commissions paid in advance.
When an agent sells a policy, the insurance company pays that agent upfront, El says. If the policyowner defaults or cancels within six months, the agent must repay the commission. “It will be a negative on your account,” El said. “You work until you clear the amount.”
This system means that El never knows what his income actually is until six months after a sale. “It might look like you’re getting $3,000, but in fact you only get $1,500,” he said.
Here’s how to smooth out the jagged edges of an up-and-down income.
What it costs to be you
A good place to start, according Joe McLean, a money manager for NBA stars, is really getting to know your money and what you must spend every month.
“It really is the little things that matter,” said McLean, founder of financial services firm Intersect Capital in San Ramon, California. “Once you know what it costs to be you, then you can figure out how to make it cost less.” He recommends taking a hard look at invisible spending, which he compares to getting rid of things you don’t need in your garage.
For instance, you may be paying monthly for apps you don’t use. On an iPhone, look at your ID under settings, check “Apple Store” and scroll down to “subscriptions.” It will show you any apps that are charging you regularly. Or open the Google Play Store app on your Android phone, then tap the menu button to see all your subscriptions.
Set up alerts on your phone every time your debit/credit card is charged. “It’s an additional reminder of money leaving your account, which is great for awareness as well as fraud protection,” McLean said.
Commit to saving a percentage of your income, says Winnie Sun, founder of Sun Group Wealth Partners in Irvine, California. Saving can be a challenge when you’re between contracts, but you can make it easier by using a different metric.
No need to think in terms of a specific monthly dollar amount, Sun says. Instead, aim for 10% to 20%. “Just be sure to automate your savings, so the amount goes directly into a retirement account, and make it consistent,” she said.
If you hit a rough patch and you feel you can’t save as much, feel free to customize your plan. “It doesn’t have to be an exact situation,” Sun said. “If it’s around the holidays, no problem.
“You can take it down a bit — and you can always gear it back up the next month or when your situation changes.”
Ditch auto payments
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See what you can do to make other things predictable, says El. One key is keeping money from leaking out, and one way to do that is to remove all your automatic payments.
As awesome and super-easy as autopay may be, El says, “it is the enemy of unpredictable income, because if the money isn’t there you are definitely going to get hit with bank fees.”
El points out that the practice some banks have, of reordering transactions to pay the highest amount first, can lead to fees on smaller transactions even if you had the funds to cover them. “You could end up with $200, $300 in overdraft fees just like that,” he said.
Use a calendar to remind yourself to make payments on time. “When you have a fluctuating income, the small bills become very scary,” El said.
“Get in the habit of living beneath your means,” Sun said. If you keep your expenses lean, it’s a win-win.
It helps when things are bit rougher, since you’re used to reining in your spending. When things are better, you have more to save.
“People don’t put enough emphasis on keeping money in,” El said.
When money was tighter, he and his husband committed to cutting everything, such as movies and meals out. They chose the lowest tier of cable service. “Anything we could do to make sure bills did not change,” he said. They used a basic, inexpensive phone service that charged $40 a month for two phones.