Whether you’re an athlete, entertainer, entrepreneur, or a commission-heavy sales professional, one of the biggest financial challenges you face is managing irregular income. One month you might be flush with cash, and the next you’re carefully monitoring every penny you have.
I get it. I went from a bonus-dominated sales role to running a startup that hid the small issue that they didn’t have any money to pay me (story for another day) to starting a business where I needed to decide whether to pay myself or save cash to make sure we could develop the product we were creating. It sucks! But don’t worry. I learned a lot from those experiences and am here to help.
With a bit of planning and the right strategies, you can navigate the unpredictable world of irregular income and build a solid financial foundation.
Think of your baseline budget as a compass, keeping you on track with your financial plan as you navigate toward your goals. It covers your essential needs – rent, food, utilities, and other must-haves. To create this budget, look at your income and expenses over the past year and use your lowest income month as a guide. This ensures you can always cover the essentials, even when your income dips.
An emergency fund is crucial when you have irregular income. It's your financial cushion for unexpected expenses or those months when your income is lower than expected. A good benchmark is to try saving at least 3 to 6 months' worth of essential expenses depending on the nature of your income.
When your income is unpredictable, focus on paying your fixed expenses first. These are the recurring costs you must pay each month, like rent or mortgage, insurance, and utilities. Once those are covered, you can allocate the rest to other expenses, savings, and fun stuff.
If you're a freelancer or self-employed, keeping your personal and business finances separate is essential. This helps you track your income and expenses more efficiently and avoid accidentally spending business funds on personal items.
Irregular income often means unpredictable tax bills. Don't let taxes catch you off guard! Set aside a portion of each paycheck for taxes to avoid any surprises come tax time.
We all deserve a little fun money, right? Create a separate "slush fund" for non-essential expenses like dining out, entertainment, or hobbies. This way, you can enjoy those things without worrying about your budget when your income is lower.
One of the keys to managing irregular income is learning to live below your means, especially during high-income months. Avoid the urge to overspend when you're earning more, and instead, save and invest that extra cash. Don’t get discouraged if you splurge once in a while, but try not to make it a habit.
If your current income source is unpredictable, consider diversifying your income streams. Take on extra projects, start a side hustle, or explore passive income options. This can create more financial stability and peace of mind.
Even with a fluctuating income, investing for the future is essential. Start small and increase your contributions during high-income months. Think of it as building a strong financial foundation for your future self.
Tracking your finances is crucial when your income is irregular. Having your budget means nothing if you don’t pay attention to it. Use budgeting apps or spreadsheets to keep an eye on your cash flow and make informed decisions about spending, saving, and investing.
Financial planning with irregular income may require a bit more attention, but that is exactly what I’m here for. With these strategies, we can navigate the ups and downs and build a secure financial future for you.
Let’s make your goals happen, together.
Past performance is no guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. This information is for illustrative purposes only.
Source: Graphics provided by Dimensional Fund Advisors
Exhibit 1: In USD. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. Funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days. Exhibit 2: The sample includes funds at the beginning of the 20-year period ending December 31, 2023. Each fund is evaluated relative to its primary prospectus benchmark. Survivors are funds that had returns for every month in the sample period. Each fund is evaluated relative to its primary prospectus benchmark. Winners are funds that survived and outperformed their benchmark over the period. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. Exhibit 3: This study evaluated fund performance over rolling periods from 2004 through 2023. Each year, funds are sorted within their category based on their previous five-year total return. Those ranked in the top quartile of returns are evaluated over the following five-year period. The chart shows the average percentage of top-ranked equity and fixed income funds that kept their top ranking in the subsequent period. Source (Exhibits 2 and 3): Data Sample: The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample. Morningstar Categories (Equity): Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/ Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, Global Large-Stock Blend, Global Large-Stock Growth, Global Large-Stock Value, and Global Small/Mid Stock. Morningstar Categories (Fixed Income): Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High-Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Long-Term Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Ultrashort Bond, Global Bond, and Global Bond-USD Hedged. Index Data Sources: Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2024 FTSE Fixed Income LLC. All rights reserved. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. US-domiciled mutual funds and US-domiciled ETFs are not generally available for distribution outside the US. Exhibit 4: In USD. US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. US Long-Term Government Bonds is the IA SBBI US LT Govt TR USD. US Treasury Bills is the IA SBBI US 30 Day TBill TR USD. US Inflation is measured as changes in the US Consumer Price Index. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. US long-term government bonds and Treasury bills data provided by Ibbotson Associates via Morningstar Direct. US Consumer Price Index data is provided by the US Department of Labor, Bureau of Labor Statistics. Data presented in the Growth of a Dollar chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Exhibit 5: Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exhibit 6: Number of holdings and countries for the S&P 500 Index and MSCI ACWI IMI (All Country World IMI Index) as of December 31, 2023. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2024, all rights reserved. International investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Exhibit 7: In USD. US Large Cap is the S&P 500 Index. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap Value is the MSCI World ex USA Value Index (gross dividends). International Small Cap Value is the MSCI World ex USA Small Cap Value Index (gross dividends). Emerging Markets is the MSCI Emerging Markets Index (gross dividends). Five-Year US Government Fixed is the Bloomberg US Treasury Bond Index 1–5 Years. S&P and Dow Jones data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved. Bloomberg index data provided by Bloomberg. Chart is for illustrative purposes only. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value Dimensional Fund Advisors does not have any bank affiliates. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
