As a financial advisor, I often get asked for advice on how to save and invest when income fluctuates month to month, especially for those in sales professions. It's not uncommon for these individuals to see wild fluctuations in income, with bonuses and commissions making up a significant portion of their earnings.
One of the first things we do for new clients is to prepare a personalized Financial Order of Operations (FOO)
, which outlines how much they should be saving and the order in which to do it. For sales professionals, we often suggest normalizing monthly income to set up an automated savings behavior based on their base income.
However, we also stress the importance of saving a big chunk of quarterly and annual bonuses. If you fail to set aside enough money for savings, you risk not being able to replace your income in the future. It's not enough to simply save the base amount; you must also save from your bonuses and commissions.
There are three components that are crucial for those with fluctuating income: cash reserves, budgeting, and goal funding. First, cash reserves are essential to bridge gaps in income. We often recommend aiming for a six-month cash reserve, rather than the standard three, because of the variations in income. Second, budgeting is necessary to track where your money is going and ensure you have a plan for every dollar that comes into your control. Finally, funding your goals and objectives for the year will help you stay disciplined and focused on your long-term financial goals.
Sales professionals need to be disciplined and have a plan in place for their money. Setting up a base compensation from which to save and investing in addition to bonuses and commissions will help integrate savings and spending with a purpose. The key to financial success is to keep it simple, but with success comes complexity. By having a solid financial plan in place, sales professionals can navigate these complexities and achieve their financial goals.
I've seen this approach work well for many of my clients, including professional athletes who also face fluctuating income. By normalizing monthly income, setting up cash reserves, budgeting, and funding goals, sales professionals can take control of their finances and create a bright financial future.
For more information about our Financial Order of Operations, check out the full deep-dive here.