Managing cash flow from multiple incomes can be complicated, and individuals often don’t differentiate the incomes in their financial planning, either from a tax standpoint or in retirement planning. Because their cash flow is often inconsistent, many people believe they can’t consistently carry out any financial planning.
For example, several of my physician clients, especially those who are members of specialty partnerships, receive two types of income. One is a traditional salary or hourly wage received for direct patient care and is addressed from an income-tax-standpoint with W2 withholdings. The second might be self-employment income or profit-sharing distributions based on the net profitability of the group; this may be distributed annually or throughout the year, and it is treated differently with regard to taxes.
Inconsistency of cash flow is actually a key factor that makes financial planning all the more necessary. Ongoing review and planning can help bring a level of financial stability that in turn helps bring peace of mind.
One challenge to managing multiple income sources is that some physicians may view their partnership distribution each year as a windfall and end up not saving or not planning with that money. Conversely, they may get discouraged in a given year if there are no profit-sharing distributions from the partnership, and they were counting on that income.
Finding a balance and managing the proper lifestyle to the variable income helps both in the short term and long term. Prioritizing goals is an important initial step in that direction. While most people’s goals may be similar (investing for retirement or college, buying a new home or vehicle, paying down debt, saving up for a dream vacation), each goal may have a different rank depending upon one’s age, income, dreams and priorities. Which goals will be funded first with the reliable income? Which will be funded last (or less), in the event the variable income does not meet expectations in a given year?
The Action Plan
The key to remember is that everyone’s situation, and therefore solution, will be a little bit different. Working with a professional to create a comprehensive personal plan can be the first step in managing multiple employment income sources. Periodic review, adjustments and fine-tuning of that plan and your investments will help foster peace of mind and maintain a path of ongoing financial stability.
Creating flexibility within your financial plan helps to ease the discomfort of inconsistencies in cash flow from year to year.