Tips for Managing a Variable Income

By Hightower Westchester on February 28, 2023

Managing a variable income can be a challenge. Not knowing how much money you have coming in can cause stress and anxiety, but there are things you can do to make it more manageable and stress-free. As we know, building an established business that maintains a steady stream of business and income can take time, and a disruption or lost client or deal can interrupt cash flows and throw you for a loop. Below are a few tips to help you stay organized when managing a variable income.

The first step is to make sure you save enough to bridge gaps. That starts with a high-level financial checkup to track income and expenses so you can have a better understanding of what you are earning and when, as well as where your money is going. You will want to assess your current assets (checking/savings and holding accounts, inventory, etc.), and liabilities (debt, payables, etc.), what you owe in taxes, and your cash flow. This can be a heavy lift at first, but modern technology and software can be a great help. Once you have this process and record keeping ironed out, you will want to consistently track and review to make changes and to confirm you are on track should any hiccups arise, and they will arise!

With a variable income, you never know what the next month is going to bring which is why budgeting is especially important. The key is to live on your previously earned income. You don’t want to spend money you have not received yet. One tip is to set a salary equal to your lowest monthly spend (this should include all your fixed expenses such as rent, utilities, and healthcare premiums, as well as your bare minimum of variable expenses such as food) and adjust your discretionary budget accordingly. In addition, make sure to set aside money for an emergency fund (which should be a minimum of four to six months’ worth of living expenses), prioritize expenses, and plan for irregular expenses as mentioned above. There are plenty of apps and software options out there that can assist you in this process. One last word of advice on this topic is when you have a good month, make sure you are putting money aside to help cover the bad months.

Tax Planning

When it comes to taxes, being proactive can be beneficial. How do you do that? By setting aside money specifically for taxes whenever you get paid. As your own employer, you are responsible for paying both federal and state taxes. In general, most sole proprietors need to file an annual return, but estimated taxes should be paid quarterly. Consider transferring a certain percentage of each client paycheck to your holding account to help cover tax payments, that way you are not hit with a large tax bill or penalties come tax time! Try to estimate what tax bracket you will be in so you can set aside the appropriate amount.

The IRS offers guidance on how to do this as well as information about tax breaks and deductions that you could apply. For example, you may have the ability to write-off costs associated with your home office, business supplies, internet, and phone, as well as travel. From a deduction standpoint, you may find some savings as it relates to retirement funding or health care premiums.

There are other taxes such as sales tax, employment tax, excise taxes, and more, so working with a CPA to make sure you are covering all angles is recommended.

Healthcare Coverage

Being an entrepreneur or sole practitioner outside of a large organization, healthcare becomes an important factor. It is a big-ticket item to replace but it is a must have. Some insurance providers have plans customized for self-starters who need good health care coverage at an affordable rate. Financially, it may be a good idea to look for a plan that offers a wide range of benefits (from access to in-network providers and hospitals to annual checkups and preventative care) for you and your family at no extra cost.

A good place to start is the government’s health insurance marketplace, where you can find out if you qualify for Federal programs, such as Medicare or Medicaid. And in some cases, a health savings account could be an option, allowing you to save pre-tax dollars for qualified medical expenses.

Retirement Planning

Even if you don’t have a traditional 401(k) through an employer, when it comes to saving for retirement as a self-employed individual, there are options. Depending on the type of account you set up, setting aside a portion of your income toward retirement makes strong financial sense.

For the self-employed, the Simplified Employee Pension IRA (SEP IRA) is an option, and another is a one-participant 401(k).

A SEP IRA is similar to a traditional IRA, and contributions may be made up to a percentage of your compensation, with an annual cap adjusted annually. While a one-participant 401(k) is for sole proprietorships and allows for higher contributions, as you can contribute twice: once as an employee and once as an employer.

The bottom line is that even with a variable income, contributing to your retirement is recommended. Just make sure to align your contributions and your budget/cash flow.

Remember, managing a variable income requires discipline, patience, and a long-term perspective. But by taking a proactive approach to your finances and seeking help when needed, you can successfully navigate the ups and downs and achieve financial stability.

Richard Flahive –Chief Investment Officer – Hightower Westchester

914.825.8639 – rflahive@hightoweradvisors.com