Young professionals work in an editing studio, making inconsistent income as contract workers.

October 02, 2019

How to Manage Your Finances with Inconsistent Income

For talent in the entertainment industry ⁠— from directors and screenwriters, to video-game streamers and professional athletes ⁠— financial planning and budgeting may seem like a non-issue because financial rewards are so lucrative.

For instance, in 2017-2018 sales of Writer's Guild of America screenplays ranged in price from $72,600 to $136,000.

The highest-earning video game streamer on the Twitch platform made more than $5.4 million in 2018, according to MediaKix.

And a rookie deal for a promising NBA player is likely to pay him $20 million over two years, according to RealGM projections.

But as industry veterans know, no matter how much they earn initially, income may come in bulk early on and dry up later. And earnings that come from self-employment, which is the norm in the industry, can be highly unpredictable throughout an athlete or entertainer's career, adding complications and uncertainty to their financial plans.

"Working in any field with inconsistent income, you don't have the comfort and confidence of a steady paycheck," explained Irene Damaryan, wealth planner at City National Bank. "You have the potential to earn more than you might at a 9-to-5 job, but if you take a break or your career ends, so do your paychecks."

That's why it's critical to take steps to reduce risk, bolster financial stability and maximize income potential while you can.

Expecting and Navigating Lean Periods

While everyone should set aside funds for unexpected emergencies — like a burst pipe, car repairs or a hospital visit — athletes and entertainers must also prepare for lean stretches when work is scarce but monthly bills still need to be paid.

That lesson has been made abundantly clear to Los Angeles-based cinematographer and director Joe Gallagher, who has worked in the film business for more 30 years.

As a union member, he receives health insurance and a pension if he works a certain minimum number of days annually. But that wouldn't have helped carry his family of four through some of the long stretches he's endured between jobs - or the complete absence of work during the Writer's Guild of America strike in 2007.

Damaryan advised creating a detailed plan, starting with calculating fixed monthly expenses. "The No. 1 mistake is to take your expenses day-by-day without a plan," she said.

"Ask yourself if your spending is in line with your average monthly income. If not, what aspects of your spending can you reduce?" Damaryan asked. “Once you've gotten a hold of your spending habits, you can start putting excess funds aside for savings."

Thankfully, Gallagher received this advice early in his career, which helped him plan thoughtfully.

“When I first started out in my 20's," he explained, “another cameraman advised me to start investing as much as possible and I did."

Those investments, in mutual funds and CDs, provided him a sense of security during lean periods.

Similarly, Academy Award-nominated screenwriter John Gatins and his wife, Ling Chan, who works as an employment recruiter, prioritize paying off large expenses in advance during periods whenever possible.

With three children in private schools in Los Angeles, that's essential. “If we have the money, we pay their tuition upfront," explained Chan.

Gallagher and Chan-Gatins have also purchased homes, which has helped nullify their inconsistent-income stress because they know they can leverage the property through vehicles like a home equity line of credit, or even sell it if necessary.

“I looked at it as forced savings," Gallagher explained, who like Chan and Gatins also paid bills in advance when he was working. “If I was out of work for three months that was one less bill I had to worry about."

Understanding Financial Nuances of Contract Work

In addition to planning for lean periods, contract workers also face the challenge of managing retirement savings, taxes and insurance.

Saving for retirement is imperative for the self-employed, according to Damaryan. Whereas traditional jobs may come with employer-matched 401(k) plans, contract workers are responsible for their own retirement accounts and should consider Roth IRA, IRA and SEP-IRA options.

"A SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) allows you to maximize your retirement funds while saving on taxes," she said.

Contract workers' income is typically reported by their employer on an IRS Form 1099 and taxes are not withheld upfront. That means the worker must set aside funds to cover their self-employment taxes, which include mandatory Social Security and Medicare contributions.

If not properly managed or anticipated, taxes can be devastating. Gallagher explained, “There's nothing worse than a good year followed by a bad year, and then finding yourself strapped in April when your taxes are due."

In addition to taxes, there are three main forms of insurance that contract workers may need to consider buying: health, life and liability. Life and liability plans depend on your individual living and working situation, Damaryan noted. She recommended researching your options to find the proper plans for you.

In fields that include union or guild membership, health insurance is typically offered to members. So that may be an insurance option for contract workers, who should prioritize taking jobs that will help them qualify for union membership.

Creative independence is wonderful. If you're fortunate enough to work in an industry that allows for it, take financial planning seriously so you'll be more prepared to handle the inconsistent income that comes along with it.

City National's wealth planners can help you plan for your life now and in the future. Visit cnb.com to learn more about a City National relationship.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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