Riding the waves of variable income

Money management tips for high-net-worth individuals whose income varies.

Variable income adds a layer of complexity to an already challenging goal: effectively managing your money as a high-net-worth individual.

Perhaps you’re a successful online entrepreneur whose monthly revenue varies based on seasonality, or maybe you make high commissions on sales a few times each year. Whatever the source of unpredictability in your income, mastering your cash flow is the foundation upon which you can build other needed components of your financial plan, such as retirement and estate planning.

So where do you begin? And what strategies can you use to inject some predictability into unpredictable circumstances?

Below are tips on how to build a stable base upon which all other financial planning depends.

Understand your income and spending

The first order of business is to gain clarity on your monthly and annual income and expenses. Your accountant and other members of your financial team, such as a daily money manager, can prepare this analysis.

Your team should distinguish between essential and discretionary spending and between recurring and infrequent expenses. Your accountants can also identify income trends and the range of variation, noting how low or high your monthly and annual income is likely to be.

Build an automated, predictable system

With this overall picture of your cash flow in place, you and your team can build a system of rules and automated transfers to defined accounts or buckets within accounts.

For example, many high-interest online savings accounts allow you to create defined buckets or separate savings accounts. Your team can designate buckets or accounts for different expense categories (quarterly taxes, healthcare spending, vacations, etc.) as well as create an emergency fund for truly unplanned expenses.

As you earn your variable revenue, you can automate and distribute a percentage of your income to designated buckets. For instance, setting aside 25% of your income for your quarterly tax savings account. Your team can also create automatic withdrawals from these designated accounts or buckets to pay these expenses when they're due.

Err on the side of over-saving

Because of the variable nature of your income, with some periods being better than others, your team should be able to propose a specific savings percentage to harvest extra savings from strong months and years. This will then cover periods when your income expectations may fall short. Rather than treating your established wealth as its own cushion, your goal is to avoid eroding your wealth in any way during lean periods.

Let’s say that your team has found that your income from year to year varies by 25%, and your annual expenses can fluctuate up to 30%. In a bad year then, when income is at lowest and expenses are at their highest, you might have as much as a 55% total change in cash flow.

To prepare for such contingencies, you could establish a specific savings account to cover worst-case scenarios in addition to your emergency fund.

Of course, there are other approaches your financial team might suggest, but the idea is to establish a system that prepares you for any contingency.

Identify opportunities for lowering expenses and increasing income

Having mapped both the big picture and the small details of your cash flow, your team can likely also identify expenses to reconsider and opportunities to grow revenue.

Your advisors can also look at your income return on various investments and suggest new potential investments.

Navigating health insurance

One fixed expense you’ll have, of course, is your health insurance. While your variable income doesn’t necessarily limit your choices, your lifestyle may demand greater service than what you’ll find on the ordinary health insurance market.

If you travel often or even spend significant time in various locations around the globe, you need global coverage and digital services available 24/7.

The good news is that various companies offer solutions that provide online medical consultations in whatever language you require, personalized concierge-level services, and coverage for in-person care around the globe.

Build on a foundation of predictability

With your new cash flow system in place, your financial team can turn their attention to optimizing your tax and retirement planning. Your new system will have already set up automatic savings for tax payments as well as automatic investments in retirement accounts.

Now, your advisors can discuss various strategies to minimize your taxes, such as tax loss harvesting, separately managed accounts, and variable annuities.

Likewise, your advisors might suggest maximizing your retirement accounts, favoring Roth contributions, and pursuing alternative investments, such as private equity.

Thanks to the comprehensive picture you have of your cash flow, you’ll be able to make these investment decisions knowing that they won’t jeopardize payment of other expenses.

The clarity of your overall financial health will help facilitate your planning for generational wealth transfers as well as your legacy and estate.

Next steps

• Request that your accountant and other members of your financial team collaborate to develop a full picture of your income and expenses.
• Ask your team to propose a system for managing your variable income that includes automated transfers and distributions as well as sufficient savings to cover worst-case scenarios.

Sources: smartasset.com; investopedia.com; watrust.com; synovus.com; foyerglobalhealth.com

Investments mentioned may not be suitable for all investors.

Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

With variable annuities, any withdrawals may be subject to income taxes and, prior to age 59 1/2, a 10% federal penalty tax may apply. Withdrawals from annuities will affect both the account value and the death benefit. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. An annual contingent deferred sales charge (CDSC) may apply

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.