The good news:
“A salary plus commission job has the benefit of providing a guaranteed base salary plus the potential for uncapped commission,” says Lori Dietzler, founder and financial planner at Zero Gravity Financial in New York City.
And the not-as-good:
“The biggest challenge with this type of compensation is that monthly income is unpredictable and makes it tough to create a budget,” Deitzler continues.
“In real estate, commissions are not written in stone but are agreed upon between parties,” says Michele Silverman Bedell, owner and principal broker at Silversons Realty in Westchester. “This gives one flexibility on how much they can earn. A challenge is that there is less consistency in how much one earns, which means that one has to be diligent in their budgeting and saving. Also, one has to have a certain personality that can handle uncertainty and risk.”
Your pay structure may vary
One common misconception about earning this type of income is that all base pays are low and commissions are paid higher on the back end to provide more “incentive,” says JoAnne Kao, director of sales at SourceMedia in New York City. This isn’t necessarily true, as the arrangement will depend on the company and industry structure.
“Some jobs give you a draw the first few months to tide you over until you start making sales,” Kao says. “Then you either keep the draw depending on how much you bring in or you ‘pay back’ the draw over time; some are straight commission, some are a combination of both.”
The key is to look for positions that have a base salary where most or all of your fixed living expenses are covered, Dietzler recommends. Find a job where the base salary will pay for your living expenses and keep them as low and predictable as possible. Commission payments can be used for savings by building a buffer for lower income months by funding an emergency fund.
Don’t forget about taxes
“Ask your employer which tax method they have chosen to apply to commission earnings- either the flat tax rate (25%) or aggregate method (your ordinary income tax rate),” says Dietzler. “Be conservative when planning your budget based on the salary plus commission compensation. Until you have funded your emergency fund, keep your spending in check while you build up your savings buffer in case there are future lower income months. Avoid using your credit cards to pay bills or discretionary spending that you can’t pay off each month.”
Cynthia Fick, a Phoenix-based investment advisor and author of the book, “The Sisterhood of Money: The Art of Creating Wealth from Your Heart, comments that many of the women she’s talked to see “budget as a four-letter word,” but most end up feeling much better after taking a few simple steps to review their spending. The best place to start is to conduct a cash flow analysis by looking at your purchases for the past month and determine if there’s anything you can cut back on.
Keep 2 bank accounts
Though your income may fluctuate, you can take steps to make the most of what you are earning. “Since your monthly income is unpredictable, use two bank accounts to manage your budget,” Dietzler suggests. “Deposit all income into your savings account and each month transfer the minimum amount to cover living expenses into your checking account, where you can set up automated bill payments.”
“Have separate accounts for bills,” agrees Kao. “Checking accounts are free so open as many as you need. Rent below your means because there will be very slow months.”
Automate your living expenses
Dietzler says once you have a few months of living expenses saved to your savings account, set up automated transfers to fund your other goals – e.g. vacations and retirement. The tools You Need a Budget and Mint are both great for managing personal finances and setting up a budget.
Kao seconds the strategy of automating one’s expenses – particularly the basics such as rent/mortgage, utilities, food, transportation, and taxes, if you’re an independent contractor.
Build your wealth
Next, focus on building your wealth with investments by determining a regular amount that is comfortable to set aside on a monthly basis, says Fick. “When you have a good month of commissions, you can add a larger amount to the investment,” she says. A Roth IRA is a great option for tax-free growth.
Though it can be difficult to set up automatic investments into a savings or mutual fund account when your income fluctuates, it is imperative to your financial success, stresses Fick.
Continue to prioritize spending
When it comes to spending – be conservative and prioritize what is necessary and important, says Bedell. She also recommends having a few months of expenses in reserve and limiting the amount of items you charge or put on credit. She also points to systems such as Quicken or QuickBooks to manage bookkeeping and budgeting.
The $ky’s the limit
“Having the opportunity to earn commissions as well as a base salary is perfect for someone who likes to see the fruits of their labor,” Fick says. “In the long run, you can usually make more money if you can handle some momentary fluctuations in income. That is the reward of being more entrepreneurial.”