How do you build a budget or spending plan when your income isn’t consistent? That is one of the most common questions we get from people trying to build a financial plan. When you have a paycheck with more or less consistent amounts coming in at predictable times, it is fairly easy to project cash flow. You only need to hang on to that job. But when you are an artist, other creative, in other words, a small business owner, your income is anything but consistent or reliable. So, how do you deal with this?
Generally, we start by working it backwards. Most people know what their expenses are. They know they would like to retire successfully. They would like to know that if no income was coming in, they would be okay. Most people have other financial goals besides retirement that they would like to accomplish. Some are very committed to the idea of leaving a legacy. What amount of income do you need and when in order to pursue these goals?
The first step is to look at your expenses. It can be hard to do this with clear eyes. It can bring up emotions of past failures on budgeting. Or the evidence that you are living beyond your means. Or spending more than you should. It can feel like a diet where you need to deprive yourself of your favorite foods. But, it doesn’t have to be that way. We take a no-judgement approach to this step of the process. It isn’t about removing sugar from your diet, but figuring out how to fit it in.
Next, when can you feel confident about the amount saving for retirement? This depends on where you live, what kind of lifestyle you want to live in retirement and whether or not you will continue to generate income in retirement. We work with each client individually to figure out these details.
From there we take inventory of what you already have and help make sure it is working within your risk tolerance, in other words is it likely to generate enough in returns to meet your needs while allowing you to ignore what the market is doing. Different kinds of savings can have a different risk tolerance assigned to them. Generally, retirement savings can be more aggressive if you are decades away from retirement than other funds you are likely to need to tap sooner. You have more time to recover from a potential market downturn with funds you won’t tap for decades.
Once we have thought through these aspects of your current financial life, we are able to start projecting the income you need to make in order to meet these goals. Most of the artists we work with are very creative about finding new sources of income. Some have begun to offer classes online, others are pleasantly surprised that they already have enough. It has led to conversations about charging more for work and affirming that the work has more worth.
Our experience has been that the process is enormously rewarding for clients. It can be hard to face financial issues, but once faced, they lose their power to cause the same level of stress. Instead, people are empowered and feel more optimistic about the future having a road map even if their income is erratic and unpredictable.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (03/21)