Charged Up! podcast: Dealing with seasonal income
Episode 63 with financial advisers Philip Olson and Julia Lorenz-Olson
One of the biggest problems when it comes to managing money is often an unpredictable income. If you're self-employed or just not numbers-focused, you may feel like budgets and investments are too much to handle, but Philip Olson and Julia Lorenz-Olson, stars of PBS Digital's "Two Cents," say mastering personal finance is easier than you imagine.
Whether you own your own business, have a side gig or work in a service industry with seasonal ups and downs, their tips will help you avoid huge financial mistakes and make strides toward a solid financial backing for your work. They focus their coaching on those in the creative industries, but their advice is applicable to anyone wanting to make good business and financial decisions.
So, let's get charged up about learning how to manage our income, no matter how much it fluctuates.
Jenny Hoff: Julia and Philip, thank you so much for joining me today.
Philip Olson: So glad to be here. Thank you.
Julia Lorenz-Olson: Yeah, thank you.
Hoff: So, I'm super excited for this episode, because as more and more people become entrepreneurs or try outside gigs I think the most confusing part is how to handle the money ebbs and flows, and to stay on track financially without depending on credit cards to get through one month to the next. But first though tell us a little bit about your background and your PBS Show.
Philip: Yeah, great. So both Julia and I went to school theaters, so we weren't traditionally looking to be in finance or business.
Julia: Not at all.
Philip: We did end up both getting jobs in the financial industry eventually. I worked as a kind of a securities broker and insurance agent for a while, and Julia got into the mortgage industry. We then kind of inter-combined forces, I sat for the CFP exam and became a certified financial planner, and we started the firm about two years ago focused on helping entrepreneurs, creatives, and artists, that we call the art of finance.
And then at the same time on the side we also have a short form web-based series with PBS Digital Studios called "Two Cents" that we co-host and write along with another wonderful couple, Andrew and Katie. That addresses kind of common financial questions of things that people might wonder about in their twenties and thirties, so kind of like how to talk about money with somebody you love or how much car should you afford, those type of things.
Hoff: Yeah, I've watched the videos and they're fantastic, so I highly encourage people to check them out and they can get on Facebook through PBS.
Hoff: And see those videos, because they're really fun to watch and they're very educational. And it's only a few minutes to watch them, so it's kind of the best of all worlds.
Philip: Awesome. Thank you.
Hoff: You're welcome. Let's start off with the basics, so as you said you guys coach creatives, which I think that's very interesting because that's a kind of a certain group of people who maybe are focusing on different aspects of their career but maybe aren't as money focused or maybe haven't been trained in let's say accounting or something. So what have you found are the biggest mistakes when it comes to managing income, money streams, bills and credit with this group?
Julia: Oh, man, there's a lot. But I think ultimately at the base of it the most important thing that people are struggling with is just a major lack of confidence, because for some reason we just kind of as a society have this expectation that people who are artistically motivated or maybe aren't math wizards just can't get their act together financially. And people, myself included, really adhere to that message, I would say that’s number one.
But then once we get past that it's definitely I think a cash flow management issue ultimately, because I mean 80, it's something like 82 percent of small businesses fail because of cash flow problems. I mean, that's the problem. If you can't make your rent you need to stop, right? You're going to be forced to fail. And so, not setting yourself up prior to whatever kind of jump you make into self-employment is definitely something that I think a lot of people get and then just sort of assuming that the cash flow will management itself is probably the biggest hang up for sure.
Hoff: So how would somebody make sure? OK, if somebody's listening to this and they haven't started the business yet, what would help them get ready and get that sorted before launching?
Philip: That's a great question and great timing because a lot of times we don't think about that stuff until we've already launched and we're starting to feel the pinch of cash flow, so it's so good to think about this beforehand.
I would just start by beginning to write something down. If you can maybe just write down something really, really, really basic such as what you expected expenses are to be in the first couple of months, expected cash flows. I think that's just a great beginner step.
If you've already started and you wanted to get a little bit more into it, you have to start keeping a business budget, that's something that we see is such a huge game changer for people that have a side hustle or are self-employed is going from having sort of a vague idea kind of what's happening with their finances in their head or when they check their bank account, to using a real budgeting software or a budget template that accounts for everything that's more specific. There's less falling through the cracks, there's less miscellaneous.
And just kind of if you want a sleek, successful business or at least something like that you kind of have to act like that's a business.
Hoff: And so if somebody is in it obviously and maybe people who are listening to this now who have found themselves in this situation but it can snowball pretty quickly, right? If you don't get it in order kind of in the beginning and then it's like, "OK, well, I'm not accounting for a few hundred dollars, not such a big deal." But then it can become thousands and tens of thousands of dollars and suddenly you're putting money on credit cards and you're trying to manage everything and you just don't even know where to start.
If somebody's kind of in that situation where they're already in the thick of it, and now they're trying to get a hold of their finances, what do they need to do kind of right now to take control?
Julia: So I would say first off - breathe, it's going to be OK. Just know that it can and will be sorted out, but it's going to take some time and intention to get it kind of back up straight.
Philip: Yeah, I would say it's really not over till it's over.
Julia: Yeah, for sure.
Philip: I'll just kind of tell a personal story that I was running basically a self-employed business as a broker and a financial adviser for probably two or three years without a budget or really kind of tracking my business finances.
Julia: Even though we were like totally on it on the personal side.
Philip: Our personal finances were cool, but it's really just so scary to go in and look at the specifics of my business budget because the numbers were all over the place - there's a lot of red, my burn rate was too fast and my income wasn't ever as good as I hoped it would be. It was very intimidating.
But I think the first step for us was just to start to verbalize that, "Hey, I'm scared of this, but I need to do it." And we would talk about it and support each other and we had support of people around us, and we finally kind of sucked it up, bit the bullet and started to look at the specifics of our business budget cash flows in and out, even if it was bad for our business.
And that was a little bit of a gut check, a little bit of a scary moment of pulling our head out of the sand, but then we were ready to say, "OK, we've got to make some changes. We maybe need to reduce our salary a little bit, and we need to sort of change a couple the ways we handle our budget." But we just had to start, you just had to start.
Julia: Yeah, and I think just really practically speaking first thing when you're ready to dive in is write down a list of everything that you spend money on in your business, everything, and just kind of do a general brain dump on paper. And then organize different expenses by priorities, so all the expenses that you need to sort of "keep the lights on" for your business, those go at the top, and then all the way down until you're ending with things that aren't absolutely essential to keeping your business afloat.
And then look at, "Well, what is my business then making?" And I would just maybe look at the most recent three months. Don't go necessarily back to the very beginning. Just look at your most recent three months history and compare and start there, and be like, "OK, where do I need to cut?"
Philip: Well, we hear from a lot of folks who feel like everything's essential.
Philip: Oh, I can't cut marketing, oh, I can't cut my admin. It all does feel kind of essential, but at the end of the day there is a list of importance and if you can list it out and say, "Well, if I had to stop paying my rent or had to stop paying for marketing, if I had to stop buying inventory or had to stop advertising, well, I know which one of those I would stop." And just starting there I think is a good beginning.
Hoff: OK, and I interviewed a woman who wrote the book about the finances of Americans, where they interviewed lots of people across the country and their financial issues, and something that she said is, "People especially in the service industry, their big problem is that their income fluctuates so much month to month, it makes it really hard to budget." And what would you say for those people where maybe one month they're making tons of money and the next month it's very low? And so how can they actually like structure a budget and have a long-term game plan versus a short-term game plan even when they don't know what next month's salary is going to be?
Julia: Oh, man, we fell into that trap for years, so we totally understand.
Philip: It's just so common. Yeah, I've had that variable income in the service industry pretty much my whole working career. Now let me ask you a question - will this be someone who's maybe doing this on the side or their full time thing as a variable income?
Hoff: Let's say full time thing. Let's say maybe your wedding photographer, there's wedding season, you're going to get lots of work and then there's slow season or you do taxes. And you've got the hot months but then you've also got really slow months, so let's say that that's your full time gig? How do you manage it month to month?
Philip: Oh, that's such good. I would say probably the most important question to ask for someone like this, so a wedding photographer, perfect example. When we would take a look at someone who is earning seasonal income like that we would notice that when times are good they tend to be spending it all. And so we have a lot of money coming in but a lot of money going out, taking extra trips, doing a lot of repairs around the house.
And then when things slow down they are very, very stressed, feel very strapped. We see this a lot of times with people who work in real estate that's very seasonal as well. But the advice that we give for that is just kind of two folds, the first one it's a kind of pre-decide a set salary for yourself, and as opposed to just paying yourself everything you make without the expenses, which is kind of the common thing. So if you made $8,000 in a good summer month, and you had $1,000 of expenses, a lot of people would just pay themselves that whole amount and we say, "Don't that."
Julia: That's $7,000, yeah.
Philip: Yeah, don't pay yourself all the gross profit. Pay yourself maybe like $3,000 or $4,000, a lot less than you made so that you can smooth out and even out when you have slow times. So we pay ourselves and we advise our clients who have small businesses to pay themselves a salary that they can sustain in high times and low times. And it is a little bit of a lifestyle shock at first, but it also takes a lot of stress off the table when things slow down.
The second thing is a little bit of a mind shift with your business budget from trying to project how much you are planning to make this month to instead of looking at how much did I have come in last month and budget based off of that. So we call that ‘budgeting based off of last month's income.’ And again, it's a little bit of a weird shift to do that at first, but when you do you no longer have to try to predict, "How much I'll make and spend based on that?" But we look at a prior month's income and say, "OK, this is how much we had come in. We're going to win this month's budget based off of that." What would you say, Julia?
Julia: Yeah, I would say that that's probably a good place to start that sort of budgeting last month's income. I think the biggest shift that we personally went through was getting out of the prediction game. We could not predict.
Philip: Our income.
Julia: Yeah, our income. And so we stopped budgeting based on predicted numbers and we started budgeting based on the amount of cash that our business had on hand. And man, that was so scary at first because you spend money completely differently; you spend future dollars differently than you spend current dollars. So even if I thought our business is going to bring in let's just say $10,000 this month. But if I have only $1,000 in my bank right now I didn't get to budget with that $10,000. I budgeted as far as that $1,000 would get me. And I was obviously really chancy with it, and then as new money come in I could continue budgeting.
Philip: When that $10,000 comes in then you get to do it.
Julia: That was the biggest shift for us for sure.
Hoff: Yeah, I was actually recently in a Fin Tech conference, and one of the new apps out, and I forgot the name of it, but I'm sure it's Googleable. But they said it's an app that actually helps exactly that. You basically kind of put your bank account information and your credit information in with the app and they figure out how much on average you make monthly and they pay you that monthly, and then they pay themselves back with your income, right?
So that you could say, "OK, on average you definitely make $3,000 a month." That is a secure amount that you can have, and so they kind of manage it for you where you get $3,000 a month so you can long-term budget. Yeah, and they pay themselves back and I think there's a little bit of a monthly fee there. So there are definitely tools out there that I think can help people if they can't figure it out themselves or they feel like they would cheat a little bit.
Julia: Oh, yeah.
Hoff: Checking out some of those tools. And take some willpower out of the game there. So how important is it to get an accountant? What are the basics that somebody should learn about accounting themselves to make sure they aren't making poor financial decisions? And then would you say getting an accountant might be the most important expense for a self-employed person?
Philip: I would say probably so.
Julia: Essentially, yeah.
Philip: Yeah, depending on how much, if it's your full time gig I would say yes. Because unless you have a really good knowledge of the tax code for business deductions, you're going to spend a good amount of time and probably make a lot of mistakes if you do it on your own. So just kind of give you some perspective, I'm a certified financial planner, I have quite a bit of training in tax law, and I do not do my own. We have an accountant. We hired accountant because they know it better, that's their specialty.
And the year that we went from just turbo taxing it as self-employed people to hiring an account to understand self-employed people, it was an immense amount of savings that we got back. I think especially if you're making the majority of your income as a self-employed person an accountant will pay for themselves five or six times over I think in the amount that they will save there.
Hoff: OK, interesting. Are there certain professions that definitely would need an accountant more, like let's say if you travel a lot for work or anything like that versus you just basically work from home on your own time? Or would you say it's equally important for all of them?
Philip: Just the more expenses you have as a business.
Julia: Yeah, the more your complicated business is.
Philip: Some service-based businesses have practically no expenses, like maybe a consultant who doesn't have to buy any inventory or travel if they work from home, they probably need it less. But especially if you have staff, if you have any kind of equipment that you have to buy and up keep, if you have to buy inventory, absolutely.
Julia: And like especially if you're doing things like flipping homes or something like that where you have to kind of invest in something for the short-term and then you get money out of that later, absolutely.
Hoff: And what about for people who are one-person businesses? And I think this is becoming more and more common, so they have a service that they can offer and they're a one-person business, how do they need to consider the money that comes in for their business? And I'll just give you an example, I know people who are one-person businesses and essentially the money that comes in for their business, that's their income, right? That's what they view it as, they put a little aside for taxes, and they spend the rest. What kind of mindset should they have when it comes to that money and not looking at as just income that you would get from maybe a job where you're employed by somebody else but rather how to best strategize how to use that money as far as like putting something back in the business or buying materials and kind of optimizing also tax breaks?
Julia: Yeah, so I would say that the biggest shift that peoplemake is even though, like let's just say your business is your name, right? Like Jane Doe consultants, like that’s just the name of your business, you need to build a very strong wall between your personal and your business finances. Because like if instead of Jane Doe consultant owned Jane Doe grocery store, you would approach it completely differently.
There is no way you would just go up to the cash register and just take money out whenever you wanted, like you're embezzling from yourself. And what you're ultimately doing is you are stealing the life blood that your business needs to grow and scale later by taking it out now.
So, you really have to, if you want your business to really be big and healthy and flourishing, you can't just take all the life blood out of it, you can't drain it out every month. You have to leave some in there for it in order to grow.
Philip: Yeah, the biggest mistake we see is that folks just don't feel it's really necessary to do that if they're just a solo thing. And so it makes it very hard to track to see if you are you actually profitable, what type of return on investment you're having on that new camera or new laptop you bought. And if your personal life is living off of money that the business needs to live is the other thing.
Julia: Yeah, it's like I had to make the mind shift of like, "That's not my money." Even though I own the business it's the business's money. It's not mine.
Philip: So we like you to eventually get to a point where the only time money moves from your business account to your personal account is when you're paying yourself that salary or maybe a bonus.
Julia: A bonus, yeah.
Philip: And that's really it. Now if you're brand new and have a brand new business, you might have to invest some in a course, but down the road you shouldn't be treating them as one, you should be treating them as two things.
Hoff: And then are there things that you should be doing using some of that revenue for that can help you when it comes to tax season, like putting it back into the business or putting it toward marketing, supplies, or whatever it is, so that when tax season comes it doesn't all just look like income for you if you're not using it all as income?
Julia: Yeah, definitely. I mean, if you are spending a portion of that income on anything business related to grow it as advertising or admin help or anything like that you get to net it against what your business is bringing in bringing your tax liability down potentially.
Although I will say that a lot of people tend to take this too extreme, so they're like, "Everything is just going under the business." And like I totally get that, but that can come back later to bite you especially if you're thinking about doing anything like owning a home sometime soon or if you are living on business and there's nothing on paper proving that the business this profitable or at least marginally so, there's nothing you can do about that.
Philip: Yeah, it can be harder to potentially find an investor; it can potentially be harder to get any kind of loans if it doesn't look like you're making any money.
Julia: Yeah, exactly. It's like find your balance; don't go too crazy with it.
Philip: But to keep it really clean the easy solution we found is that if you have a business account and a personal account, and everything that's related to the business just gets swiped on that card. And then when you have personal expenses, just to swipe on the personal card, it keeps it really clean.
Hoff: Talking about cards, how wise is it to use a credit card to start funding a little bit of your business? If you need to buy some inventory or you need to get the computer or get the equipment or whatever it is that you want, and bridge basically until the next time you get paid, kind of what mistakes and what best practices have you seen regarding using credit cards for your business?
Philip: In our experience I have personally mostly seen that this is very easy to get into but tough to get out of for a lot of folks. If they're starting a new business that they have little experience with, they tend to overestimate how easy it will be to make money, how fast they will be making money, how good they will be at marketing.
And so we generally advise against starting businesses on a credit card if at all possible. I know a lot of people that do it anyway, but the rare circumstance that we think it's acceptable to put business expenses on a credit card is if you have something pretty lock solid written in a contract that will come through to pay that off.
Julia: Yeah, like if you just happen to land like this big plan and you have a contract in place saying, "Upon the completion of this project I will give you $10,000." Then I would say I would feel OK using a credit card to get you through that project.
Philip: Yeah, I mean, I even can think of I have family members who have started businesses on credit cards at zero percent interest knowing that they'd pay it back off in six months, and four years go by and they still have it. It’s unfortunately a little bit too common.
Julia: Yeah, I would say if it's a tool that is more safely utilized by business that are more established.
Philip: Yeah, maybe not a brand new business.
Julia: Yeah, because at the beginning it's just like it's one more layer of risk that you're putting on top of an already sort of risky situation, which is starting a business.
Hoff: Yeah, and so what would you say as far as let's say somebody just wants to bridge the gap between, "OK, we're just kind of on a slow season and I know the season's heating up," let's take our wedding photographer again, is it OK to use credit cards then to kind of bridge the gap until you know the money is going to start rolling in? Or again, do you need to just be living off of last month's salary until that anticipated salary does actually become a reality?
Philip: I would if we were talking to our client who's a wedding photographer we would tell them however possible to avoid floating on credit cards. It just it ends up becoming a really difficult cycle to break. And as Julia said it's already so risky. I mean, if right now you have no other choice, then you have no other choice.
Philip: But down the road this could be something you can set up that you don't need to rely on that, and that's the goal I would want folks to be able to do is to use cash flow.
Julia: Yeah, because I think these kind of questions are also like there's a spectrum of sort of wisdom around them, right? It's not an absolute black and white, absolutely never do this or always do this, it never really works out that way in the real world.
And so I would just say if people are not wanting to go the more conservative route which is the one we take and we've found just ends up in the most peacefulness, but if that's not the route you want to take then give yourself a limit going in, knowing that like, "OK, I know I'm going to float this credit, but I'm going to write down somewhere and share it with somebody saying, 'I am not going to go into more than let's just say $5,000 of credit card debt to start this.' And that's the line in the sand that I'm drawing and I'm going to work within that."
Even just making those kinds of limits on yourself prior to getting into the project can really go a long way to help keeping it from spiraling out of control.
Hoff: What about side gigs, are there kind of financial best practices there for side gigs or is it a little bit looser, because it's really just extra money?
Julia: I would say, no, it's actually not looser. A lot of people tend to because they're not having to rely on this stream of income necessarily to "pay their rent" people are extra loosey-goosey with it. And to me if you're going to take that time and effort that it takes to truly get a side hustle going, treat it well. Just as you would a bigger business and it will end up in more profit, because that's the whole point is that at the end of the day you have more money in your pocket and you started with for as little effort as you can, right? So treating it like a grown up business even if it's small is even more important I think.
Hoff: What about putting money aside for taxes? What should they know if they're just starting out, if you're creative a just starting out and you're going to have your own business or you're starting a side gig, what do you need to know quickly kind of just about taxes as putting the right amount of money aside or paying it how often you need to pay it and that kind of stuff?
Philip: Well, if you're going to have less than $600 of profit for the year you're not going to owe any tax for it at all. So if it's really, really small don't sweat it. But if it's going to be bigger than that we recommend just as a kind of a safe rule of thumb, if it's your first or second year in business, to take 25 cents of every dollar you make and set that aside for Uncle Sam.
That will pay for your federal taxes, probably your state taxes, and your social security, Medicare taxes, which all kind of add up and sneak attack you at the end of the year if you’re not careful. And so if you make a thousand dollars to set $250 aside, which kind of hurts, but you don't want to be in the situation that so many people are in that they all have a great year but now I owe $8,000 in taxes and I can't pay it.
Julia: And it's gone, yeah, like I've spent it.
Philip: That's the worst and it's actually happened to us before.
Julia: Absolutely, early on.
Philip: So if you have a little side savings account or something you can set it aside in, just do that. And then after your first year, you will actually need to start paying quarterly estimated taxes, which a lot of people with small or medium size businesses just don't ever realize. The government does require you to do that, and if you don't pay estimated quarterly payment they'll penalize you too.
Philip: And so you can figure out what that is by talking to your accountant, they'll tell you what your "coupon" is that you need to be paying every quarter. And then as long as you pay that you won't be penalize but if your business is growing just stick with the 25 percent ratio until you kind of get, I don't know, north of $50,000 or $75,000 in profit a year then you should probably change that. But 25 percent is probably safe under that.
Hoff: If you're just starting out with. Finally what gets you charged up about helping people who feel averse to numbers and math to get clarity about money?
Julia: Oh, man, so much. But I think the biggest thing for me personally is just watching people personally transform, like I think when they really realize, "Oh, like I don't have to be good at calculus to be a great CFO of my life." Watching that happen in person with our clients, it's just, isn't really incredible, it's so satisfying for me to see that happen, that what gets me really excited.
And because it has effect outside of money, right? If you can do this you can't help but feel more confident in other parts of your life. So that's what I love about it.
Hoff: Perfect. What gets you charged up, Philip?
Philip: For me it's just kind of seeing that moment of like click in people's eyes where they realize they can do this, and that they are good at it, which is so extra fun for folks that don't have a traditional business or financial training, but that like us, we went to School for the Arts and we run a financial advisory business. So you can learn it and it's really empowering to do.
Hoff: Absolutely. Thank you guys both of you for your information. I highly recommend people to check out your episodes on PBS, on Facebook, they're really fun to watch, and then check out your site as well. Thank you both for joining me today, really great information.
Philip: It's fun. Thank you.
Julia: It was a blast. Thank you.
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