Oran Hall Managing uneven income flows
There are several types of cases in which people earn income that does not come to them in regular, equal or consistent streams.
Regardless of the size of such income streams, their effective management is key to how well the income earner fares.
Let me share some examples with you.
A top life insurance and financial adviser related to me that there was a particular year that was going poorly for him. Up to the end of the third quarter, he had sold very few policies.
Then came the fourth quarter. Business took off exponentially. He generated more business than he had done in any previous year in that quarter alone. Naturally, he earned a lot of commission income for his efforts.
Another example: Back in the day when life insurance companies had among their products policies which were hard to distinguish from deposits, paying very high rates, and high commissions too, one insurance advisor got a commitment from a prospect to make a very large deposit. He counted the commission that he was expecting to earn and laid plans to spend the large sum.
Then the company lowered the rates and the prospect lost interest. It made him deflated and angry as his plans became a mist.
A few months ago, I visited a friend, a retiree, who has converted to poultry farming. His place was quiet. There were few birds and few eggs, but a few workers were cleaning up and doing repairs. He was not earning much, though spending quite a bit.
His situation was different from that of the life insurance and financial advisers. He knew when his slow period was coming and he prepared for it, His position was not necessarily risk-free for, as he mentioned, sometimes demand tended to change for various reasons, and natural conditions sometimes interrupted the activities of his business and therefore his income flow.
There are people in other situations in which income ebbs and flows or even dries up periodically. For example, there are individuals engaged in seasonal employment, such as in agriculture and construction, and there are self-employed people who have those experiences.
If we go back to the first case, the high-performing adviser, had he not been managing his money well, he could have been in dire straits in that period of drought.
The other advisor did what so many other people tend to do: they consider as certain what they have not yet received, some going as far as to spend it before receiving it. But is that not in line with how many of us think? Look at what happens leading up to the Olympics and the World Athletics Championships – how we count our medals with great certainty long before our athletes set foot on the plane.
It can be challenging for people who do not earn a steady, reliable stream of income on a pre-determined basis, weekly or monthly, for example. People who work on a commission basis are a good example.
Without proper planning, it could be living like royalty today and like a pauper tomorrow. If you are in this group, to avoid this situation, it is prudent to remember the uncertainty and unevenness of your income stream. Avoid speculating on how much you will earn. Do not plan to spend what you have not received.
You probably need a spending plan more than a person who has a known and reliable stream of income. To more effectively manage this plan, determine how much you and your family need to live on a monthly or weekly basis. Be realistic. Set spending priorities and know the difference between your needs and your wants.
When your income exceeds how much you need to live, save the difference so that you can close the gap when your income falls below how much you need to spend. This should reduce the need to borrow when there is a short fall. Borrowing may ease a cash flow problem in the short-term but worsen it later. And if you must borrow, do not put yourself in a position in which you are not able to service the debt.
Do not forget to save. Maintain a reasonable level of liquidity to be in a better position to handle emergencies and short-term needs. Maintain your savings programme; things could get worse. Monitor your finances regularly and save unexpected cash receipts.
It can be difficult to manage personal income flows that are not equal, consistent and regular, but it is not impossible. With discipline, good planning and the willingness not to spend the unseen, it is possible.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.