Managing Cash Flow When Income Isn’t Predictable

For many professionals, like business owners, consultants, salespeople and anyone who relies on bonuses or commissions as part of their annual income, paychecks don’t always arrive in neat, predictable amounts. Although I am salaried, my husband is not. A significant portion of his income comes from commissions he earns, so I have a unique understanding of the emotional and practical challenges that can come with this. Over time, I’ve learned the goal isn’t to eliminate uncertainty, but to build a system that makes the uncertainty manageable.

One of the most effective tools I’ve found can be referred to as the “personal paycheck system.” Instead of letting income volatility dictate your spending, you can instead create stability by directing all earnings into a holding account (perhaps a savings account) and then transfer a fixed amount to your personal checking each month. Stronger months build the buffer and slower months draw on it.

Another important step is knowing your numbers. I encourage clients to identify both their basics (the minimum they need to keep life running) and their lifestyle number (what they actually spend in a typical month). The amount transferred from the holding account should reflect the lifestyle number, so your plan matches reality, not wishful thinking.

Automation is also essential. We automate savings, retirement contributions, insurance premiums, and more, so the most important parts of our financial life stay on track, regardless of how any commission amount looks for us. If you’re self-employed with variable income streams, you should also automate savings for taxes dependent on your tax bracket. These are a non-negotiable bill, and you’ll want to prevent any year-end surprises.

In addition, for those with highly variable income, a larger-than-average emergency fund can become an important stabilizer. In most cases, advisors recommend three-to-six months of basic expenses in cash. For people in a variable income situation, consider closer to six-to-twelve months for a more appropriate emergency fund.

Finally, plan ahead for high-income months. Decide in advance how much goes toward long-term goals, short-term needs, and any lifestyle wants. Windfalls can be very powerful tools when used intentionally. Variable income does not have to mean financial stress. With the right structure, it can provide flexibility, resilience and opportunity.

- Margaret Gooley, CFP®, Reify Wealth Advisors

This article was included in the Reify Wealth Advisors Quarterly Newsletter.