4 Financial Planning Tips For Irregular Income Earners

June 17, 2015

Both my wife and I earn irregular income as freelance writers. Our yearly income can vary significantly depending on what type of projects, contracts, or gigs we land. Many of our friends in Los Angeles earn their living in a similar fashion in fields like editing, sound design, acting, post-production, or line producing. Salespeople, farmers, contractors, small business owners, and artists will all recognize the challenges of financial planning while earning variable income.

So how do irregular income earners plan their finances, especially when most financial wellness focuses on income ratios such as spending 25% of income on rent or a mortgage, saving 15% for retirement, or getting enough life insurance to cover 10-12 times your income? What if your joint income was $50,000 two years ago, $150,000 last year, will range between $75,000-$100,000 this year, and is completely uncertain next year? Here are some ideas to consider:

  1. Living “As-If”

Financial decisions look significantly different while making an AGI of $150,000 versus $50,000. Look at your last three years. Add up your AGI and divide by three. In the above case: (50,000+150,000+(75,000+100,000)/2)) /3 = $95,833.

Consider your next three years.Do the prospects look more hopeful or dim? Do you or your partner plan on taking off significant time from work to stay home with kids? Is someone considering a career change?

If things are looking up, perhaps it is okay to budget “as-if” you earn $100,000 per year. If you want to play it more conservative, you can budget “as-if” you earn $80,000 per year. This simple planning tool, also known as incoming smoothing, can help guide households with irregular income to not overspend when the harvest is good or live in unnecessary poverty during lean times.

  1. A Larger Emergency Fund OR a Business Account OR Both!

Most financial wellness articles will suggest 3-6 months living expenses in an emergency fund. Working in a career with irregular income, you might want to consider beefing this fund up during a year when your household exceeds income expectations to one year’s worth of living expenses. That’s easier said than done, of course.

One organizational tool we use at my household is to separate an emergency fund of about 9 months of savings (that goes completely untouched) and a business checking account, where we deposit all our income. The business account fluctuates and gives us a sense of how we are tracking for the year. Our monthly budget is transferred each month from our business account to our primary checking account for bills and spending.

  1. A Way to Still Dollar Cost Average

I am not an investing expert. I do not try to time the market nor do I feel comfortable making huge purchases relative to the rest of my investing portfolio. For the retail investor, dollar cost averaging (i.e. consistently investing the same amount of money over time) may yield the best and lowest risk investment returns by buying more shares when stock prices are low and fewer shares when stock prices are high.

In my household, we go back to our “as-if” income and invest 15% in a target date fund each month. To illustrate, if my wife or I sold a big project or simply had a better than expected year, we might indeed have a large chunk of extra cash waiting in the business account – say $30,000 extra. Some investment experts would suggest investing all of it at once, and some data might even show this is a more optimal investing strategy. But we are writers who are focused on our financial wellness and would rather take the safer approach and continue to invest monthly through a lean year or two in the future than possibly make a big market “play” when we have the money and when stocks are possibly overpriced.

  1. Remember the Big Picture

There is probably a good reason you earn irregular income. Maybe you are passionate about your career and willing to put up with insecurity in exchange for following a challenging path. Maybe you are building a business, a reputation as an artist, or a client list. Maybe you have chosen an up-and-down profession because it is lucrative. Whatever your reason, remember intelligent financial planning is a way to give yourself strength, freedom, and flexibility to become the best at whatever career path you have chosen.

Careers are marathons, not sprints. Becoming great at your job is the best way to maximize your lifetime income, provide for yourself, your family, and your retirement. Your financial planning should buttress and assist in your long-term goals and not be guided solely by guidelines designed to broadly apply to people in different career and financial situations than your household.