If you don’t work a “traditional” job, one with an office and a salary, you’ve likely dealt with the challenges of variable income. Sometimes, entrepreneurs can barely pay themselves as they try to scale a new venture, while small biz owners are at the whim of seasons, customers, or contracts. Basically, you might not know what’s going into your bank account during a given month.
And while that’s part of the thrill of the hustle, it can also be the downside of self-employment. We all want some stability in our lives, even if we want the freedom that comes with entrepreneurship. So how can you create security while also navigating the world of variable income? In this episode of Worth It, we share our stories and personal experiences with variable income, how we worked through it, and ways YOU can find more security and consistency with your business.
[02:00] Dustin & Danielle’s history with inconsistent income in business and previous careers
[04:35] How they combated slow months and seasons
[05:45] How variable income affects your personal life + business
[06:29] The downfall of “last-minute money-making” when building a successful biz
[07:59] What you want to experience when you have a slow month
[08:25] What you can do when months (or seasons) are slow
[09:32] How passive income can help you meet your minimum living expenses
[11:15] Why you might consider shifting away from transaction-based models
[12:57] What it means to fall into the “good times trap”
[14:48] Why saving and investing is essential, even in down months
[15:25] How you can generate passive income from your savings
[15:43] How to calculate your BULB
Most of us love what we do. We’re in business for ourselves because we enjoy the freedom that comes with (probably) not having a 9 to 5… but that doesn’t mean it’s all rainbows and glitter. One of the biggest complaints we hear from our entrepreneur clients and listeners is that “I don’t always know what I’m going to make in a month.” And boy, do we hear you.
Dustin, when he was new to the financial planning world, struggled with the compensation models in the profession — it was essentially sales-based and he didn’t always know if he’d make his sales quotes or commissions each month. Thankfully, the industry has changed and our financial planning firm now offers more fee-based services (more on this in a bit).
For Danielle, working in marketing, direct sales, and eventually social media management, the variable income struggle was always real. To make ends meet sometimes, she’d need to take part-time jobs. We’re sure that’s something a lot of you can relate to… but it’s a cycle we want to help you get out of.
That’s because we see how variable income can affect a person and their business efforts. You might have to rely on personal credit cards to keep things afloat at home, or you might end up hustling yourself to death just to make some last-minute money (Guilty!). But worst of all, you take on clients, projects, or ill-fated investments that aren’t aligned with your business or what you really want for yourself. We want to help you build long-term success, not month-by-month success.
So, instead of talking about how to make money at the 11th hour, let’s talk about what to do when there’s a down month.
Have you ever tried to make your “down months” an opportunity? It’s hard as hell, we know. You’re probably sweating bullets over making ends meet, or thinking about how to find clients for next month. But we want you to try a slightly different tack (at least for a few hours).
Try to see a down month (or season) as a good time to invest time in your business. Not financially, but with “man-hours” and attention. Create systems and learn new things that can support you when things pick back up. Maybe institute email organization, project management tools, or update your contractors and onboarding sequence. This way, your business will be turned into a well-operating machine when the work starts rolling back in.
Secondly, use this time to figure out your minimum living expenses. We all tend to tighten the belt when the income slows, but we think minimum living expenses shouldn’t be an “emergency response,” but rather the basis for your entire finances. To do this, look at your annual expenses, both personally and professionally.
Tally up your personal expenses by total for the last year (don’t worry about divvying them out by category or expenses) and then divide by 12. This should give you the average per month that you need to get by. Of course, some months are higher than others, i.e. when your car insurance is due or when the holidays roll around. But in general, you’ll have a minimum income amount to work with. Now, you can create systems within your business that help you ensure you’re going to hit that minimum number. Anything over that? We’ll talk about what to do with it in just a bit 😏
Note: if you’ve recently increased a monthly expense, such as moving into a higher-rent apartment, you’ll need to calculate that into your annual total to get a more accurate picture.
Speaking of systems that help you hit your minimum, we think slow months are a good time to look at your business model and consider ways you can make passive (or more reliable) income. Dustin, for example, shifted to more of a “fee-based model” in his financial planning work; offering clients an annual fee for financial and investment advice. This meant he knew what he’d take home from each new client, and have a more reliable income than selling financial products (which not everyone wants to buy!).
While we know financial planning models don’t necessarily apply to your business, we think there’s something you can take away from this: Look for ways to shift your business from a service or single payment (transactional-based) to an ongoing or passive income-based model. Can you create a package that offers your services in a more condensed model that people can buy year-round? Can you offer retainer packages with long-term contracts so you can at least bank on income for a set contract window?
Think of what you can shift in your business to create a more stable income for yourself, even if it might take some extra work on the front end. Don’t worry, you have the time!
Now, there’s one last thing we want to talk about when it comes to variable income: your mindset. Especially as it relates to saving. Most of the time, people think of saving and investing as a bonus: “If I have enough money this month, I’ll set some aside.” Actually, you guys, it is non-negotiable. In addition to your minimum monthly expenses, you need to be setting aside a specific amount each month for savings.
While we do recommend setting aside about 25% of your income for savings, we understand this isn’t viable with variable income. So, choose an amount you believe is reasonable and then put that thing on automatic. Set up auto transfers each month so you know exactly what’s moving into savings and so you include it in your minimum monthly income.
Don’t have any savings currently? Start building up 3-6 mos of living expenses (that minimum monthly number is coming in handy here!) to fund your emergency fund. Once you fill up your emergency funds, it’s time to send everything else to investments. (You can set up a simple investment account with online tools like Schwab.com, but a CERTIFIED FINANCIAL PLANNER™ will be better able to help you get started and advise you on the investments that are right for you.)
Eventually, you’ll have an entirely funded Back-up Life Bank, or BULB as we like to call it. What’s that, you ask? About 25x your minimum yearly income. When you invest your money each month, you make it possible to weather down months, seasons, or years by living off the interest on your investments. Of course, this takes time but it’s a huge way to create stability for your future self.
Want to learn more about the Back-Up Life Bank? Go listen to Episode 63: Self-Employment + Retirement: Work-Optional Lifestyles.
Last but not least, we really want to drive something home for you in this episode: think about down months as the norm. While nobody wants to assume they’re always going to be “just getting by,” we think this is a great attitude to adopt when it comes to your finances.
Why? Because you’ll be able to build long-term wealth when you’re not set on spending a ton of money each month. “Good months” are the months where you can sock away money and build up that buffer, while “down months” are the months you’ve already planned for and can get by on. Hopefully, over time, you have more good months than bad months… and you build major security as they come. But you’re never beholden to “constantly hustling” to make ends meet; you’re comfortable, calm, and killin’ it… even when things feel a little slow.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
What if you had a clear formula to help you figure out how much to save… while paying down debt and enjoying life? It is possible… when you know your numbers.
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