How to pay yourself a salary when your income is sporadic

Dear Pete,

I’m in sales. I’m pretty good at it, too. I make really good money, but itcomes in randomly. I may make $30,000 in one month, and then not get paid again for five months. It’s the nature of what I sell. How in the world am I supposed to budget when my money flows so strangely? I go from elation to panic, every four months or so. It’s hard to budget with a moving target.  — Horatio

Dear Horatio: There are no moving targets in this situation, Horatio. You just don’t know how many arrows you have in your quiver. Whether you’re on a commission income, variable income or you’re a freelancer, not knowing the exact amount of your compensation can create some serious havoc … if you let it. There’s a really easy fix, that’s slightly difficult to install. Once it’s installed, you’re good to go.

Before I give you the installation instructions, we should examine why a variable income is so difficult to manage. It’s because our bills are often due every 30 days, yet our pay is arbitrarily dispersed. Monthly pay, weekly pay, one lump-sump, no matter what the pay frequency, we have to learn how to match it up with our monthly obligations. The failure to rectify our pay frequency with our bills is why so many commission-income earners finally bail on whatever industry they serve.

One of my biggest fears for variable-income earners is that they may make major spending decisions during good months. Committing to a house or rent payment, financing a car or even planning a vacation during good times can result in a bigger struggle when the dry periods arrive. If you find yourself in this situation, then you must take immediate action to make ends meet.

Don't let the bank decide how much house you can afford

I used to work with many Realtors who struggled to transition their seasonal and sporadic income into a sustainable financial life. They would yo-yo from barely surviving to deceptively thriving. They were forced into resourcefulness the longer they went without pay, and then felt sweet release when they received their next five-figure check at a closing.  No matter how many times they would yo-yo back and forth between good and bad, they couldn’t stabilize their income. The situation called for a salary. And a salary is exactly what they got.

You need a salary, too.

But first, you need to understand the one number that is holding you back: your 30-day expense number.

How much money do you spend every 30 days? If you don’t know the answer within two seconds of reading this question, we’ve isolated one of your primary issues.

I’ve learned over the years that variable-income folks often struggle because they don’t know their 30-day expense number. They tend to think in more of a binary sense. They either have the money for whatever they want to buy in the moment, or they don’t.

Horatio, there’s a little trick to making this work. It may seem like semantics, but you need to change how you view the money that flows into your household. What you used to think of as income, now needs to be called revenue. It’s the revenue that will fund the operations for Horatio Enterprises. If you continue to view your revenue as income, you will spend through it with very little regard for the impending cash-flow shortages just months away. Your revenue will be used to create your income, but the two terms are definitely not one in the same. Your salary will be based on a few very simple factors, and it will be paid to you via your commission pool.

Lessons to learn from NFL players' finances

Begin by figuring out exactly how much it costs you to live for a 30-day period. Stick to the necessities, and keep the discretionary expenditures to a reasonable minimum. Once you’ve come to a total, subtract off any fixed income that comes into your household on a monthly basis. This fixed income could be a significant other’s income, or maybe you have a small part-time job with a consistent income. For instance, if you spend $3,500 every 30 days (all bills included), and your significant other’s income is $1,200 per month, then you are left with $2,300 of obligations your income must fund. That’s your salary now.

When you get paid, deposit the entire payment into your commission pool. That pool can only do one thing — pay you $2,300 every month. You can pay yourself $1,150 twice a month, if you want. It really doesn’t matter. After about three months of this manufactured stability, your financial life will feel calmer.

You also need to separate your commission pool from your savings. They are not the same thing. If you use them interchangeably, you will compromise your ability to pay yourself a salary. When your commission pool swells, you either pay yourself a modest bonus, or you may be able to give yourself a monthly raise.

You can learn more about the entire process of creating a salary for yourself in my book The Commissioner.

Peter Dunn is an author, speaker and radio host. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com