Self-Employed, with an Uneven Income? Smart Financial Tips

By Martin Brown

uneven incomeMore and more of us have jobs that produce uneven incomes. We will make a lot of money one month, but then very little for the month or two after that. The lessons of how to make those fat times cover the lean times are particularly useful at this time with an uncertain economy weighing on everyone’s mind.

Having an uneven or uncertain income, may seem like a tough road for the salaried employee, but it is an everyday way of life for millions of Americans who work as realtors, mortgage brokers, commissioned sales people, freelance consultants, and many more.

Take, for example, the number of women who are self-employed. According to the US Small Business Administration, there are 38,390,000 women who work for themselves. That is 6.8 percent of the workforce.

Learning to budget for an uncertain future is never easy. Many men and women have fallen into debt for the lack of successful planning. You don’t need to have that happen to you—and it won’t, if you take the small amount of time needed to plan for the times when your income takes a dip. Remember the old saying: No one needs to plan for the upside, making more money in a given month than you expected, it’s the downside you need to be prepared to handle.

Here’s how:

1. Estimate your monthly baseline income.
To do so, take your gross income for the past five years, add it together and now divide by 60, the number of months in five years. Most people who work on commissioned income will see some pretty substantial swings over this period of time. This estimated figure give you a reasonable average of what you can expect as a monthly baseline income.

2. Add to your liquidity.
If your monthly gross averages, after taxes, is $3,200, and you’ve had a $4,800 month, take that additional $1,600 and put it in a money market interest-bearing account. Financial planners suggest that you build a 12-month reserve as an emergency income fund, for when and if your industry hits a real slump. Not being a full-time salaried employee has its benefits, but income stability is not one of them. An extra cushion in the bank never hurt anyone. So when extra income comes your way, it makes good sense to build up that all-important cushion of reserved funds.

3. As your income swings there will be times when you have to borrow funds.
Always accept a bank credit line when it is offered, even if you don’t need the money.

Why? Because when you really need the additional funds, there is a good chance your balance sheet won’t look as good as when you did not need the money.

You may wonder why you’re paying a nominal annual fee to a bank for giving you a line of credit. But when that money is needed, you’ll be very glad you secured access to additional funds, even though they were not needed at the time. Beware, however, to aggressively pay down equity lines, and other forms of credit when you hit a high-income streak. What you don’t want to do is pile loan upon loan and dug yourself into a financial hole so deep that you have no realistic hope of coming back to even.

4. Don’t forget to fund your retirement.
Under the wise old rule of “pay yourself first,” look at your retirement savings as one more monthly obligation. There are a variety of easily accessible retirement plans that will show you how much money you need to set aside to reach a certain level of savings in a fixed number of years. That amount can vary greatly, depending on whether your planned retirement is ten years, or thirty years, down the road. If you have to pay the mortgage, the car loan, and your taxes every month, you can assign an amount to your retirement savings account, and PAY YOURSELF FIRST!

5. Be honest with yourself as to what you can save—then stick to your plan.
Some people thrive in the uncertain world of commissioned sales, or being self-employed. For others, an uncertain income is a nerve-racking rollercoaster ride that keeps them awake at night. If this life is right for you, go for it; but if not, there is nothing wrong with seeking the stability of a steady paycheck.

But if you choose self-employment, do so with a plan that allows you to spread the wealth you’ve made when you need it most.

Additional Reading
Smart Retirement Planning
Can Money Buy You Happiness

Tax Deductions for a Home Based Business