Variable income. Such a nice way of looking at it. Variable brings up thoughts of income coming soon, or maybe… simply that it varies a bit every once and a while from the norm.
But those of you who have lived on ‘variable’ income know that sometimes it means ‘low’ income, or even ‘no’ income.
It’s feast or famine in today’s freelancing world, and sometimes no matter how hard you work you’re left sitting with nothing on the horizon wondering how you will possibly be able to eat this month.
I have been in that place.
I’m kind of in that place now. That no-income place.
The nice way of putting it is I’m just in a bit of a dry spell… and then people give that sympathetic nod, before trying to change the subject away from my clearly flagging career.
But even though I’m currently in a three month ‘dry spell’, I know that I have a system in place to sustain my basic living costs. More than that, I have money set aside to take weekly lessons and coachings, money for the gym and the odd concert. I have the tools I need to both decrease my ‘no income’ stress and to use this time off productively: namely, to do some reworking and development on the trusty vocal chords.
How do I do it?
One big tool that I started using this last fall is paying myself a salary.
Yup. That’s right.
You’re currently talking to the reigning employee of the month of the Christopher Enns Tenor company. Now, before you get distracted by the fact that I put the word ‘company’ after my name… no, I am not incorporated. There is no fancy paperwork that you need to fill out in oder to set yourself up this way. You just need to make a mental shift.
So let’s take a look at this 7th-grade-science-project style (because why not make a personal finance blog just a little more nerdy..):
PURPOSE:
To create stability when living on a variable income stream.
HYPOTHESIS:
By separating your business and personal accounts, your business can pay you a monthly salary thereby creating the feeling of stability even though your income stream is still variable.
MATERIAL:
You will need:
- 2 bank accounts.
- An idea of your basic living expenses
- Optional: Pipe cleaners (cause they’re fun)
PROCEDURE:
It’s probably best to use two chequing accounts. Separate banks are fine. The same bank is fine. Just remember that if you bank with one of the big banks, opening another account will probably come with more fees. So poke around a little to find a solution that costs you the least.
I use separate banks. One of them is TANGERINE, which has no fees associated with its accounts. PC financial is another no-fee option.
This is more of a mental step. Your business account doesn’t have to be an actual business account at the bank. I tried this originally, but found that it was just a bunch of extra fees for services that I didn’t use. Those business accounts are set up for people who are making tons of deposits in a week, or who need to have several people access the account; Services that aren’t all that necessary to your average artistic freelancer.
No more mixing business with pleasure. When your business makes money it all goes in to the business account.
This separation is great for all kinds of reasons, not just for paying yourself a salary. By keeping business transactions and personal stuff separate your records are clearer for tax time, and it can also be a good tool for separating out finances as a couple.
CHECK OUT: DR ARTIST AND MR CHRIS: SEPARATING YOUR BUSINESS AND PERSONAL SELVES
FREQUENT QUESTION: How much should your salary be? That’s something that may take you a while to figure out. I recommend finding out what your basic living expenses are.
Rent + Food + Basic Utilities (heat, water, internet, phone) + transportation (Transit, bike, car) + medical/health needs
After you get that number, see where you’re at. Obviously that doesn’t include any cash for entertainment or fun, or personal savings like retirement or that big fancy house you’ve been dreaming of.
I take those basic expenses, add a few bucks for spending money, add a fixed amount that I tuck away for long term savings, and that’s my basic salary.
Of course it can fluctuate. If your business is doing well you can give yourself a raise! But remember, the point of this is to keep your personal income dependable, and absorbing the variable thing in the business account.
Need help figuring out your 'salary'
I made you a worksheet to help you figure it out!
Yet again. It doesn’t have to be separate but it can be. It can be a budget category on your spreadsheet, or you can open up an actual savings account (watch for fees again!). What ever helps you separate out this money in your mind.
I try to aim for 4 − 6 months of salary just hanging out in that account. It can take a while to get there, but any amount is helpful when you don’t have money coming in. I think that when the job market is as crazy as it is, the more you can have stocked away the better.
Here’s where it all pays off: I have no income coming in, and yet I can still pay all my bills, keep my savings goals going, and even eat occasionally.
Thereby achieving complete personal stability even though there is tons of variation on the business side.
EXPERIMENT:
I’m living this experiment!
I’ve been using the “pay yourself a salary” method for the last 6 months.
I opened a separate business account with TANGERINE (no-fee banking rules!!), and kept my old TD account for my personal banking.
INTERESTED IN A TANGERINE ACCOUNT: IT’S EASIER TO OPEN THAN YOU THINK…
All the income went through my Tangerine account and I started paying myself on the first of every month.
Budgeting got a whole lot simpler, at least on the personal side. Almost a little boring, which is nice.
January has been the first time I’ve had to dip in to my payroll fund, and even though I’m making next to no income this month, the same ‘boring’ payments keep on coming through.
DATA ANALYSIS:
For some people this system might take a while to put in to place. A payroll fund might just seem like another thing to save for, or worse… another thing that you can’t afford.
But you don’t have to worry if you can’t plunk down 6 months of salary. Even just putting a few of these ideas in place will really help:
- Separate your personal and business funds
- Figure out what a good salary would be for you. First calculate your most basic expenses: that’s the lowest salary you could live on. Then add a few things that make it actually livable. And hey, presto! Your ideal salary! Knowing this number is an incredible tool… seriously… I’m gonna talk about it all the time.
- A plan for when money does come in. It’s tough when you get a few thousand dollars in a week to not go crazy and spend it immediately on shiny things. If you have a plan for how you want your business and personal finances to work (the plan is above… see pictures) then you know where you can funnel that money.
DO NOT WAIT UNTIL YOU HAVE ENOUGH MONEY TO START BUILDING THE FRAMEWORK. BUILD IT AND THE DOLLARS WILL COME…. Or build it, at least… so you’re ready if they do come.
want to take your variable income to the next level?
Check out this spreadsheet I made – it lets you compare variable income AND expenses over the course of a year.
CONCLUSION:
It’s so hard to create stability, to make a normal budget when your income is all over the freaking map.
There are other ways to handle variable income, but paying yourself a salary is clearly a really great tool for getting the job done.
With just 7 steps you can make a system that allows you to:
- Separate business from personal income and expenses
- Create complete stability on the personal side, by receiving the same amount every month (it’s so much easier to budget)
- Make budgeting way simpler. By separating out your business from your personal, you keep a lot of the crazy variable purchases (1000 dollars in plane tickets in November, a tuxedo in December) off your personal books. So you can keep all the nice normal, regular things in one account and budget, and keep all the crazy, variable, artist stuff over on the other side.
- Weather the dry times by creating a payroll fund that can keep the paycheques coming, even if the business isn’t making any dough
- Take the power away from variable income. Reduce stress. And live a happier, healthier life.
IN JUST 7 STEPS.
It’s basically magic.
Want to start getting control of your money? How can I help?
Chris Enns
Financial Planner/Opera Singer
Money never came naturally to me. In fact… I was a bit of a disaster. I remember (very clearly) what it feels like to be ‘financially out of control’.
And honestly, I still get stressed about money… that doesn’t stop… the difference is that now I have the tools to deal with that stress.
And those tools are what’s made it possible for me to build a life full of the things I want: art, creativity, travel, family and more.
If you want to start getting control of your money I’d love to help. You can start with THIS QUIZ, visiting my GETTING STARTED PAGE or by checking out my SERVICES page.
I’m a freelance musician and have been in the “I have no money and am paying for shit off my credit card, everything is terrible, this is my life forever now” part of the freelancer’s psychological cycle. I just did some calculations (i.e. tried to make a budget, for real this time, for the umpteenth time) and realized I may be coming up on the “woah where did all this money come from, this is uncomfortable and weird, better subconsciously find dumb ways to get rid of it so life can return to normal/broke!” part of the cycle… only I kind of hate this cycle, and want it to end, so I think I am going to try this. I’m off to make some Tangerine accounts… also, I’ll be coming to your talk at u of t next week! 😀
This post has given me great food for thought for when I finally take the plunge into self-employment! This was one of the things I was having trouble figuring out and you broke it down into small, simple steps. Awesomeness.
Glad to help!!
Such a simple, yet effective way of organizing income (especially when it’s variable income). Thank you so much for the great tips; I can’t wait to start this!
If you’re concerned that you will blow it all when you get it, have your account pay you weekly or bi-weekly, just like you were on someone else’s payroll. You don’t get the windfall reaction and things still get paid.
That’s an awesome idea. Break it down even further… I like it.
Hi Chris, thanks for the post – I’m definitely considering this! A question: when you are working out of town for extended periods, do you pay for your food out of the business account or the personal account? I could see it both ways since it’s already budgeted into the personal salary, but since you are on the road those expenses could be considered business expenses. I also find that I spend different amounts on food when I’m traveling vs. at home. Your thoughts?
Hey Alex. Solid question. I’m sure people do it both ways. I like to keep all business expenses on the business side just to keep my records clean for tax time. So ya, when I’m away on business, I funnel all that food through my business account.
It’s always more expensive to eat when you’re traveling, even when you’re careful. It just happens.
What you could consider on months when you know you’ll be gone a lot, is paying yourself a few hundred dollars less and keeping that money on your business side since the business will be covering a larger portion of the food costs for that month.
The more separate you can keep business and personal expenses the better in my opinion.
This is similar to what a lot of freelance writer friends of mine do, or at least the smart ones do! It’s a fairly easy thing that just takes discipline(the hard part) and some nice detailed steps, of which you outline here rather well. Bravo 😉
hey Chris!
What TD account do you use? I have TD but was thinking of switching to Tangerine, because TD charges me a large fee each month if I dip below a certain minimum amount (and the minimum is quite high). When I have extra money, I want to put it into savings, etc, not in my checking account, so how do you get around these high fees?
Also, have you been happy with Tangerine?
thanks so much! your blog rocks:)
I’m a big fan of Tangerine. PC financial is another no fee option.
I have a really basic chequing and savings account with TD (Like 3.95 bucks a month) because I like some of the investing options with them. The problem with the basic plans is you aren’t allowed that many transactions before they start charging you, so you have to be careful.
Tangerine has been great, no fees on the accounts, and the interest for their savings accounts are generally a bit better than the big banks.
I’ll write a post on banks soon, and go into it a bit more deeply, but if you have any other questions in the meantime, shoot me an email.
Christopher! You did it again! Spoke into my reality at just the right time! (Hence, the copious use of exclamation points!) (!!!!) Just to let you know, I’m using the YNAB software, and for the first time in my life I’m enjoying looking after my finances; in fact, it’s a bit addictive. Bless you. I’ll be sending the link for this blog to Suzie and Armin, and posting it on my Facebook page for all my other variable income artist friends.
Lynne!!! That’s awesome!!!! I’m so glad you’re enjoying it, it was YNAB that turned me into a big budget nerd. So… watch out for that :-). YNAB is awesome for dealing with variable income, especially if you follow Rule 4.