You earn your living advising others on what to do with their money. But what you do with your own money is just as important. For the more than 12 million self-employed Americans, including insurance professionals with commission-based incomes that can vary widely during the course of a year, this issue can become complex.
With some creative and proactive effort, however, independent agents with fluctuating incomes can achieve the same financial discipline and reap the same rewards as their captive counterparts. If you're a commission-based agent, you simply need to adopt a longer-term view of finances than someone who earns a regular paycheck. Generally, after a few years of fluctuation, you should be able to observe patterns -- a sales slump around the holidays or in the summer, for instance -- as well as determine a typical minimum monthly income level.
Budgeting, spending, and saving can then be done with that "base" in mind.
To help establish a routine savings plan, you can follow these steps:
1. Set baseline goals. You could establish an absolute baseline of sufficient savings to cover expenses such as quarterly estimated self-employment taxes and emergency funds. Common wisdom suggests keeping six months' living expenses -- not income -- in an emergency fund at all times. For independent agents, this fund can become a "floating" fund to pull from during leaner times, then replenish when their income increases.
2. Pay off credit card debt. Paying off debt may not sound like saving, but the compounding effects of high interest rates, fees, and penalties associated with credit card debt can take a huge bite out of earnings and potential savings. A credit card purchase that you don't pay back immediately may cost three or more times as much as its original price.
3. Try "zero-based budgeting." Everyone has fixed monthly expenses such as rent or mortgage, as well as consistent variable expenses (those that occur each month but fluctuate, such as food and some utilities). Some agents accumulate savings by holding off on discretionary purchases until they achieve a certain level of savings. Then they continue to save and allocate a portion of that saving toward a planned seasonal purchase.
4. Stick to a percent. With each commission check you receive, set aside a pre-determined percentage, based on your budget, for savings and investments. Once you have your emergency fund in place, fund a savings account to which you contribute on a regular basis. Ideally, every year, 10 to 15 percent of your after-tax dollars should go toward savings and investments, which will in turn fund long-term personal finance goals.
5. Save your windfalls. When you earn or receive more money than usual, such as a high-premium life insurance policy or a benefits sale to a large company, you should save that extra money rather than splurging on something you don't really need. Once you are used to living on your budget, chances are good that you'll actually feel more comfortable if you stick to that budget.
6. Bill yourself. Take advantage of any automatic deduction plans that you can set up. You may not be receiving regular paychecks from your employer, but some financial institutions do let you arrange automatic withdrawal from your checking account to a savings account. Record this expense like a bill every month to painlessly accumulate savings. If necessary, start with a small amount such as $25 or $50 per month and increase it whenever possible -- when you pay off a credit card with a $50 monthly payment, for example, increase your savings by that $50.
7. Save like a pro. Don't just keep savings in your checking account with a mental note that they're "saved." Instead, put them in an investment or savings vehicle you've selected. If you don't want savings tied up for the long term, you might choose a money market account that allows withdrawals only at certain minimum levels. Or purchase short-term CDs (three or six-month terms) on a regular basis. The strategy will provide some interest earnings and force you to constantly reinvest.
Whatever method you choose, you need to save on a consistent basis. You'll likely see your savings climb faster than you expected. As an insurance professional, you should be up to date on any financial products or services that can help increase your savings. And chances are good that you'll be surprised by the way your funds accumulate.
Bradford G. Stroh is the co-founder and co-CEO of Bills.com and co-founder and co-CEO of Freedom Financial Network. He can be reached at brad@bills.com or through his blog at www.bills.com/blog.
