6 Tips For Thriving On Commission-based Income

January 21, 2019

Are you living on earnings from commissions? You may be working for a firm, but in effect you’re working for yourself. Your income depends in large part on your actions, which is exactly what successful sales people and consultants like about it. The reality is, however, that the sales cycle, the economic cycle and your industry cycle influence the timing of your income. This can disrupt your personal finances if you’re not prepared.

Whether your income is strictly from a draw against sales production, or partially based on those sales, the keys to thriving – instead of just surviving – are planning and organization. I was a self-employed consultant or commission-based employee for most of my working life until I came to Financial Finesse. These are the tools I used to manage my uneven income:

1. Track income and expenses

If you’ve got uneven income (gig work, commission-based income, etc.), it’s essential to know when income is expected and where every dollar goes. Find a way to track your expenses – this could be an app, a spreadsheet in Excel or just paper and pencil. Once you’ve got a good idea of your regular bills which don’t change, such as housing and car payments, you can focus on tracking the discretionary spending only, such as food, entertainment, travel and gifts.

2. Create a cash flow-based budget/spending plan

Living on a variable income is a challenge when you have fixed expenses due at predictable times. What worked for me was using a cash flow-based budgeting system that I set up for myself in Excel, which tracked when I expected income to arrive and how that related to timing of my expenses. I made my own, but you can try this comprehensive Personal Cashflow template from Microsoft Office, this summary “Financial Snapshot And Budget” template from BudgetsAreSexy.com or use your expense tracking app. The key is to budget by source and timing of income.

3. Develop a plan to fill the cash flow gaps

Your home, car and groceries are paid every month, but you might not be. Where the timing of income doesn’t match when you need to pay for essential expenses, be purposeful in how you’ll close the gap. Many people default to using credit cards, 401(k) loans or home equity lines of credit (or worse, a payday or title loan) to manage uneven cash flow, but those things are an expensive bandage, not a long-term fix. Close your gaps this year by committing to:

  • Build a generous surplus. A cash cushion will help you navigate when you’re not paid when expected, you have unexpected expenses or when the extra work isn’t available. Start by building $1,000 balance in your savings account, then add to it by saving 10 percent of every check until you’ve got 6-12 months of basic living expenses. This may take a few years to fully accomplish. You can save $1,000 in a year by saving about $2.75 per day. Save $5.50 per day and you’ll have it in six months. Save $10 per day for 100 days and you’ll have it even sooner.
  • Diversify your income. There’s a second – or third – source of income for everyone. Explore your side hustle options. Aim for enough regular work to cover an essential bill, such as your mortgage (or rent), your car or student loans. An extra 4 hours per week can supercharge your financial goals. If you’ve got multiple sources of income, Steady’s income tracker can help you figure out where you’re getting the most bang for your effort. Not sure where to start? See 7 Side Hustle Blogs That Will Inspire You To Make More Money and 50 Ideas For A Lucrative Side Hustle.

4. Use multiple accounts

Consider using a checking account, an account for your emergency fund/cash savings and an account for your “planned spending.” The planned spending account is for everything you know you’re going to spend during the year, such as taxes, gifts, life insurance and vacations. Add up all your planned spending and figure out what percentage it is of your total budget. Deposit that percentage in your planned spending account for every check you receive.

5. Reorganize due dates for bills

Contact your lenders to see if you can change your due dates for bills to correspond with when you’re typically paid. If you’re taking a draw on the 1st of the month, for example, see if you can reorganize your mortgage (or rent), car payment, cell phone, etc. to be paid on the third. That way you’ll get the fundamentals taken care of no matter what happens.

6. Prepay your taxes

If you’re paid as an employee, make sure you have enough money withheld by your employer. Use this IRS withholding calculator to figure out the correct number of withholding allowances to claim. Make sure you include any funds you receive from your side hustle. If you’re self-employed and paying quarterly estimated taxes, consider using an app such as Track to give you clarity on what you have earned and what you owe.

The bottom line

Thriving on a commission-based income requires treating your personal finances like business finances. Preparation and diversification are essential. Put the time in to get things set up and watch yourself thrive!