Ever heard the story of the guy who burned through a fortune worth $150 million and still had debts to pay? If only Cher could have delivered a second smack on the cheek of Nicolas Cage and another “Snap out of it!” Then maybe things would be different. One thing that’s certain with those who work in “the biz” is the lack of certainty around earning and saving. Volatile-income professionals (VIPs) of all types often share feelings of scarcity even in the midst of their big-income years. Here are a few ideas for those of you who are VIPs.
When a Little Hoarding Is OK
A ground squirrel hoards extra nuts in preparation for the winter, a tactic that would serve VIPs well. The typical rule of thumb for how much cash to keep in a bank savings account (emergency fund) is 3–6 months of expenses.
For the VIP, however, it might not be uncommon to have a year or more with little or no income. If you set a higher ceiling on your emergency fund, say one year’s worth of essential expenses (housing, groceries, medical, etc.), you can avoid having to raid your nest egg for at least a year. When income picks up again, you can replenish the savings. After your balance exceeds the one-year expense level, invest the surplus. Rinse, repeat.
Going Big When You Can
The big-income years are the moment-of-truth years for an investor. They present a golden opportunity to front-load your nest egg with large, lump-sum contributions so that you can relax in the years where you’re unable to add anything. Self-employed individuals have the additional opportunity to greatly reduce their tax bill by using retirement plans designed just for them—defined benefit and solo 401(k), to name my two faves. A few big years of contributions may even allow the VIP to coast into their retirement years without adding another penny to the portfolio.
Sufficiency vs. Abundance
My first pro bono client for 2014 gave me an eye-opening reminder of how subjective “enough” is when he shared that he wanted to replace his $25,000 income by age 70. VIPs, in my experience, sleep better when they go through the exercise of fully knowing what they would need to have to be OK. Also, imagine what other kind of income you could generate if your current work ended. Then the “abundance” financial plan will feel more like a want than a need.
Helping Mr. Cage
Luckily, Mr. Cage is still a bankable star. But he needs a good financial advisor to help him strike the right balance between saving and spending. If you know Nick, please tell him I’m happy to do it pro bono until his taxes are paid off, or until 2016, whichever comes first.
