Dealing with a fluctuating income

We’ve all come up with systems to deal with our money, and creative types come up with some of the weirdest — like having a savings plan which involves taping gold coins to the undersides of dresser drawers, or stashing jars of tip money in the tank of your toilet. I had a good friend try to explain the advantages of his multiple-shoe-box system, which I never fully grasped. Any system is probably better than no system, and as I have gone deep into personal finance, I’ve learned a few things that you may find helpful when building your own.

In my last post, I outlined what I believe to be the #1 reason artists struggle with their finances — It’s hard to save when you don’t know how much money you’re going to make. If you didn’t get a chance to read it, you can check it out here.

With this post, I’ll begin to explain the strategies you can use to deal with this issue.

I’ve talked to so many artists about the steps they could take to get their finances under control, and more often than not, I get met with blank stares. I understand — it’s a lot to take in. And I’m not writing this post to reprimand you, or to show you how you’re doing it all wrong. This post is my way of saying: I LOVE YOU, and I want you to do well, be comfortable, have the nice life you deserve, and to keep doing your work. I’ve already done this for myself, it’s made a huge difference in my life and my art practice, and I hope it can help you too.

Okay – Let’s dive in

There’s nothing inherently wrong with a fluctuating income. The problems come when the uncertainty of it stands in the way of planning and saving for the future. The simple answer to this issue is to quiet the uncertainty. I’ll be explaining how you can do this by creating a system where you live on a fixed monthly amount, based on your average monthly intake and known monthly expenses. With this in place, you can then set-up a structured savings reserve, which is the most important part of creating a stable platform to build a sustainable plan for the future. Zzzzz — WAKE UP! I’m just getting started!

Having worked in this messy, unpredictable, and often unforgiving industry for years, I’ve found myself at every point of the spectrum, from waiting for months to get paid as I horde every last penny, to crying real tears of joy when all the checks I’ve been anticipating arrive on the same day. It’s a famine to feast existence, and if you make the wrong moves in the feast months, you can be stuck in famine mode for longer than necessary.

I can’t stand it when I am asked to project my future income — because it’s impossible — but to begin to wrap our heads around this, we need to come up with some estimated numbers to work with.

To this end, let’s use a fictional example of a loveable weirdo named Susie, and her completely mainstream cousin Susan. (Sorry, this is so high-school-text-book, but it’s the best way to get the point across)

Susie and Susan live together, share all their expenses, and at the end of last year they totalled up their income and found that they made the exact same amount, $36,000 each — but in completely different ways. Susie is a painter with gallery representation, and has solo and group shows now and again. She does the occasional commission, freelance graphic design on the side, and often makes extra money dog sitting. She’s a jill-of-all-trades, and can apply her skills to a lot of things, so she makes money here and there, and it rolls into her hands sporadically. Susan has a steady job as a paralegal, and brings home a regular paycheck twice a month. When broken down month by month their income for last year looked like this:

fluctuating-income3

The surprising fact of this completely fictional situation, is that Susan was able to save 10%  or $3,600 of her salary, and Susie wasn’t able to save anything, ending the year financially in the exact same place she had begun it. [This story is handy, because making it up allows me to steer it exactly where I want it to go — while ignoring complicated details (like taxes and free will)].
Susan was able to save a good chunk of money last year, because with her regular paycheck she was able to count on being able to pay her bills month after month. She could also budget in her savings goals, and therefore didn’t need to worry that the money she was putting away for the future would be needed tomorrow.
Susie on the other hand is in a situation where every month looks different, and within each year there are a few good months, some really lean months, and the rest are just okay. At the beginning of the year she may have a few things planned (like shows), but she also just lets her work and income unfold as time passes. And as a consequence of not knowing exactly what money she was going to make month to month, Susie didn’t put any money away. Mysteriously, by the end of the year everything she had made was spent.

It stands to reason, that since Susie and Susan both made the same amount of money and share living expenses, that Susie could have also saved a significant chunk of her income. What strategies, other than giving up her five-glass-a-night chardonnay habit, could Susie use to make her income look more like Susan’s, giving her the peace of mind to save?

5 Sm*artly strategies to smooth out a fluctuating income:

1. Pay yourself a salary
2. Make saving your first expense
3. Prioritize your spending
4. Amortize everything
5. Create a robust emergency fund

So that I keep you on the edge of your seat — and make sure you’re still awake at the end of this post — I am only going to cover the first strategy on the list now, and continue with the rest in future posts.

Pay yourself a salary

BankingFlow5
Check out my banking flow chart — I made this just for you, visual people! (click on it to enlarge)

If uncertainty is the problem, then why not smooth out your income so it mimics a regular paycheck? This requires a little bit of upfront work, and some strategic planning, but it’s well worth it.

The first thing you need to do is decide when you’re going to start. It’s best to plan this for a month when it looks like your income will exceed your expenses. If we’re still talking about Susie, then she’d be smart to make this leap in August, which was by far her best month of the year (see above graph of Susie’s income).

As that prime earning month approaches, open a separate checking account for your business where you deposit all your income checks. This account will be where you dole out your salary from. You could do this at the bank where you’re already a customer, or at an online bank where you could get a bit of additional interest.

Next, calculate the amount of money that you need to live on every month. This is the most obnoxious part of the process, and you can be as rigorous, or as lazy as you want in your calculation, but know that the more accurate you are, the better this is going to work. It’s essential that you make sure it’s a realistic number. It needs to cover your expenses, and match your lifestyle without going overboard. If you pay yourself too much you’ll burn through your money too quickly, and the process will break down in the blink of an eye. Be sure not to forget to include the amount of money you want to save each month. The number you come up with for expenses and savings will hopefully be close to an average of your previous 12 months of income. If your expenses and savings goals don’t match-up to your average monthly income, you may be under-earning for your lifestyle. This, of course, is a huge topic in and of itself, which I’ll save for a future post.

In the case of Susie, she’d hopefully come up with a salary of $3,000 per month, $2,700 of which she determined she’d need for expenses and lifestyle choices, and $300 (10% of her salary) is then earmarked for savings.

With your salary numbers in hand, you can then set-up automatic payments from your business checking account to your personal checking account on a monthly or bimonthly schedule in the amount of your expenses and lifestyle. Set-up a second set of automatic payment to go directly into your various savings accounts in the amount of your budgeted savings. This will give you access to a steady stream of money, while effortlessly saving, and keep your surplus at arms length so it isn’t vulnerable to excessive spending. What could be more perfect!

It may be perfect, but in the beginning it can also be a very delicate balance. I’ll reiterate, the key to get this going is to strategically plan your salary’s start date on an ‘up’ month — otherwise there won’t be enough in your business account to start making these automatic transfers. If determining an ‘up’ month is too unpredictable, you can save little by little until you get one month of salary stashed away, allowing you to pay this month’s bills with last month’s income.

Either way, when you see you’re opportunity to start paying yourself a salary — grab it. The more time you spend doing it, the more comfortable you’ll feel budgeting within your salary amount. But you can kick a boulder right through this delicate plan if you’re not careful. So don’t take a set-it and forget-it attitude until you’ve built-up a track record, and know your business account has enough insulating funds to go on auto pilot. The other four strategies on the above list will help get you there, and I’ll be explaining those in next few posts.

You may have your own great system — and if it works for you, then I not only applaud you, I want to hear about it! If any of this resonates with you, please leave a comment below, or send me an email at christina@sm-artly.com.

© 2014 Christina Empedocles. All rights reserved.

7 Responses to “Dealing with a fluctuating income”

  1. Mandy Pants October 1, 2014 at 5:02 pm #

    Yes to “under-earning for my lifestyle.” Please advise!! Great blog, Christina. I still have your beautiful zine on the subject. Keep the financial 411 coming!

    • cempedocles October 4, 2014 at 7:31 am #

      That zine was one of the most important things I did in grad school! I have to thank you again for giving me the forum to make it, and for going above and beyond with helping me to edit it. This blog really was inspired by that project!

  2. Saundra September 27, 2014 at 5:05 pm #

    Great job Christina! Glad to see you doing what you love. I always believed you could. The article is excellent!

    • cempedocles September 27, 2014 at 10:51 pm #

      Thank you Saundra — This means so much coming from you! I was thinking about your lecture on setting up banking systems when I wrote this!

  3. Millicent Ann Crichton September 27, 2014 at 1:14 am #

    As our financial situation will be changing shortly I look forward to putting your advice to the test.
    It’ll feel good to have some control. Thank you.

  4. Flesche Hesch September 27, 2014 at 12:15 am #

    This blew my mind because it feels so accessible! It is also super helpful for new business owners in those early potentially lean days of building.

    This got me, “I LOVE YOU, and I want you to do well, be comfortable, have the nice life you deserve, and to keep doing your work.” Well done!

    Fab infographic as well!

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    […] reading my last post about paying yourself a salary, I know you ran right out and set up your new banking system. However, if you happened to missed it […]

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