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As someone with a six-figure self-employment income, I can also say that cash flow is a very important part of the equation. If you take an appropriate discount
by abalashov 9y ago
As someone with a six-figure self-employment income, I can also say that cash flow is a very important part of the equation. If you take an appropriate discount for bad/unsteady cash flow (and few of us do), one is led to the conclusion that $100k+ in SE income can often afford one a ~$40k lifestyle at best, in terms of recurring expenses one can reasonably commit to and consistently afford.
That's something a lot of people on salary don't get. Back when I was on W-2 and had much lower compensation than I nominally have now, I had my ducks in a row, taxes paid, a positive savings rate, and good credit. That hasn't been the case since I went self-employed about ten years ago.
If someone were to divide my annual revenue (less expenses) by 12 and distribute it to me on the 1st of every month, a lot of problems would be solved. But because that's not how reality works, I take a bath in late fees, interest, overdraft fees, no access to credit due to bad rating, etc.
Some of those things are more avoidable than others depending on the choices one makes, but that's not the point. The point is that W-2 and SE income are not equivalent. Unless you've devised some compensation scheme that is substantially similar to salary as a contractor, you can't afford anywhere near a $100k lifestyle as a consultant earning $100k+. There are many days I'd happily trade places with folks who get a lower, but steady paycheck every two weeks for doing more or less one job.
- Consultant32452 9y agoIt sounds like you are not budgeting appropriately for the amount and variability of your income. I just recently left the consulting game, but did so for nearly a decade. If you're truly interested in making a change I recommend reading The Total Money Makeover by Dave Ramsey.
- abalashov 9y agoI'd like to think I budget appropriately, though I'll admit I didn't always when I was younger; it's an acquired skill. But you try budgeting appropriately through a divorce and absurdly expensive custody battle. But in a way, you're making my point for me; because $100k in SE income is not the same as $100k in W-2 income, it requires special budgeting considerations, to the degree that I'd benefit from reading a whole book about it. :-)
- Consultant32452 9y ago>But you try budgeting appropriately through a divorce and absurdly expensive custody battle I did. >But in a way, you're making my point for me; $100k in SE income is not the same as $100k in W-2 income. Actually, I'm making the exact opposite point. The budget is the exact same. The budget is what forces you to not over-spend when times are good, so that you have plenty of money around when times are lean.
- abalashov 9y agoWell, indeed; what that adds up to is that it's safer (if perhaps unwise, that's debatable) to get closer to the line with a stable income than an unstable one. Otherwise, it seems your advice is "live within your means", "spend less than you make" and "save for rainy days". Thanks, dad.
- Consultant32452 9y ago>it's safer to get closer to the line with a stable income than an unstable one. No, it means you've failed to accurately assess what the "line" even is. >Otherwise, it seems your advice is "live within your means", "spend less than you make" and "save for rainy days". Thanks, dad. No, my advice was a specific set of principles and practices laid out within Ramsey's book which could help you to overcome the problems in your life that you were discussing. I was not promoting useless platitudes.
- abalashov 9y agoMy point was that with greater volatility, a smaller portion of income remains sufficiently consistent, and thus the line will be lower and the budget will be smaller.
- Consultant32452 9y agoI don't think you would feel that way if you actually read the book and followed a real written budget. I know this because I've lived it myself. The only difference between variable income and static income is gauging the size of your emergency fund. Otherwise, your budget is identical.