Finances are pretty easy to manage when you are paid a regular salary. However, things can get a little more confusing when your income is irregular. There are many different ways you can be paid these days, some common options are: having a salary, being paid through commissions, having salary + commission, being paid quarterly, etc.
We all know the easiest way to manage your finances is to make it as regular and systematic as possible, but how do you do that when you are paid in a form other than a typical salary?
In this blog post, we are going to look at how to do just that when you are paid salary + commission as well as all commission.
This is a pretty standard model for people who work in sales or even some independent contractors.
In my experience, the best way to handle your income when it’s salary plus commission is to break it up. Have a plan for the salary component, then have a plan for the commission component. The goal should be to use your salary for your living expenses, investments, debt payments, etc. Then come up with a plan with your commission that might add on to those things and include your wants. Let’s look at an example of this.
Note: It’s not always doable to cover everything through your salary component, but the closer you are to it, the better.
Sarah makes $4,000 a month from her salary and then her commission varies quite a bit based on how well she performs.
Sarah read my advice and plans to take care of everything she needs with that $4,000 per month. This includes rent ($1,000), food ($500), utilities ($150), ROTH IRA contributions ($500), student loan payments ($300), emergency savings ($550), travel fund ($300), car payment ($350), etc. This leaves her with $350 a month to take care of her wants (clothing, going out, apartment stuff, etc.) Almost all of this is automated on a monthly basis.
Then, she has a plan with her commission that gives her percentage breakdowns of where the commission should go (20% travel fund, 25% wants, 20% extra towards debt payments, 35% taxable investment account). So if she makes $2,000 in commission this month, $400 will go to her travel fund, $500 will go to wants she has, $400 will go towards student loan payments, and the remaining $700 will get invested for her future in a taxable account.
Having it set where your salary covers your monthly expenses is huge for stress. This way, even if you have a bad month of sales, you have enough money to live off of. You can always save some shopping for months where you earn extra income. Delayed gratification.
However, if your base salary is not enough to cover your normal monthly expenses, savings, investments, etc. then you will combine this method with the next and add a payment account to help supplement you on the months you’re short (this will make sense after you read the next section).
There are tons of all commission jobs like contractors, real estate agents, car salesman, and many other sales professionals, etc.).
All commission is a little harder to manage than salary plus commission just because you have no guaranteed income. Again, the goal here is to make it feel regular and like you are paid a salary so let’s take a look at how you can do that 👇.
The first thing you need to do is determine what your monthly expenses are. This is similar to reverse budgeting where you give yourself enough money each month to take care of your life. So let’s say your expenses are $4,000 a month and on average you make $70,000 a year after taxes from your commission (= average of $5,833), but again it ranges quite a bit. Some months you make $10,000 and other months you may only make like $500. It’s very irregular.
What you need to do is set up an account where your commission goes into, this should be separate from your checking or savings account. I usually call it the ‘payment account’. This is where you are going to pay yourself from. Let’s say it’s January and you just got paid $10,000 which automatically goes into this payment account. What you are going to do is now send $4,000 to your checking account (the amount you need to live off every month). This will cover your living expenses, investments, debt payments, savings, etc. You will schedule those things out (reverse budget) then spend what is left every month. This leaves you with $6,000 in your payment account. So next month, when you only receive $2,000 in commission, you can send an extra $2,000 from the payment account so now you have the full $4,000 you need to live off.
Then, continue to monitor and check in on this payment account and see where it is at. Maybe you did really well for the past 6 months and your payment account now has $20,000 in it. Now you have the option to move some money out of there and invest it, pay off debt, fill your travel fund, or contribute to your ROTH. It’s a pretty good feeling when this happens!
Note: Checking the ‘payment account’ often is crucial, you want to make sure it doesn’t get too low without being able to plan ahead. Let’s say commissions are low for whatever reason, you can begin to plan for where to cut back or how you might be able to increase income to make up for the shortfall you may have due to a long lull in income.
This structure makes your commission feel regular. You basically are making yourself the bank and supplementing your income on the months you’re short, but then on the months you make a lot, you build up the payment account for the future. I believe this is crucial to your financial success. I have seen firsthand too many people in sales who just spend their entire commission every time they receive, then in months they are short they can’t do anything they want because they don’t have the money. Or they are forced to pull money from their emergency fund to help which is not a habit you want to create.
Whether you are salary + commission or just commission, give these methods a try for 3-6 months and see how much more relaxed you are with your money. My clients have loved switching to this structure. It really is freeing.
Financial Advisor