Boost Your Employees’ Financial Success by Sharing These Tips to Manage Commission Pay
The Federal Reserve Board estimates that 28% of working Americans have a household income that changes from month to month. 10% of adults with variable income have experienced financial hardship as a result. It’s time to address this.
As a business leader, you took quite a bit of time carefully crafting your commission pay plan so it would be a win-win for your employees and the company. Now that you have the right plan in place, it’s time to help your employees who earn commissions improve their financial success.
Don’t Yet Have the Right Commission Plan? We Can Help.
Encourage savvy financial management at your company when you share the following tips with your employees.
How to Budget When You Earn a Variable Income
When you earn a variable income, your budget should be based on your minimum earnings, such as your base salary. If your company provides transparent insight into your commissions or other variable comp earnings, you can also base your budget off your average yearly income divided by 12 (for each month of the year).
Once you know your minimum earnings, you will need to calculate your expenses.
The easiest way to do this is to start writing down a list of your expenses at the beginning of the month. Record everything you spend money on and how much you spent. At the end of the month, categorize your expenditures into categories:
- Variable expenses (utilities, food, clothing, etc.)
- Fixed expenses (rent or mortgage, car payment, monthly prescriptions, subscriptions like Netflix and gym memberships, etc.)
- Irregular expenses (summer camp, annual medical expenditures like new glasses, back-to-school costs, etc.)
Once you’ve categorized your expenses, multiply this month’s total expenditures by 12 (for each month of the year) and then add in the costs for other irregular expenses that will occur in other months.
When you have all your expenses added up for the year, divide the total by 12. This number represents your average monthly expenses. If this number is lower than your minimum or average monthly earnings, you can move to the next section on savings. If this number is higher than your minimum or average monthly earnings, you will need to cut your expenses.
If you find you need to cut expenses, look to your variable expenses first (this is why you had to categorize all those expenses). Most people can reduce their grocery bill, hold back on a few clothing purchases, and decrease their electricity consumption to save money.
As a commission pay earner, the good news here is that your income will either be significantly higher than your base salary or, in some months, it will be higher than your average. You can use those better-than-average months to boost your emergency fund, so you have the flex room to cover excess expenditures when you need to.
Savings Tips for an Irregular Income
Savings is always based on goals. However, before you can start determining your savings goals, you need to determine your natural approach to money management.
Certified Financial Planner and Investment Advisor, Eric Roberge, recommends that you imagine a “cash flow spectrum” to envision your spending personality. One end of the spectrum focuses on tight control, whereas the other end of the spectrum gives more freedom to “wing it.”
People who fall closer to the “tight control” side of the spectrum tend to nickel-and-dime themselves about every spending decision, so they can reach their long-term spending goals right on time. People more on the “wing it” side of the spectrum make sure they meet unexpected short-term spending needs, but they may end up stressed in the long run as their long-term goals get delayed.
Most people fall somewhere in the middle. Wherever you fall, that’s completely fine. But it’s best to know what your approach is to money management before you start setting up savings goals.
Meeting Your Savings Goals with Commission Pay
Robert T. Kiyosaki, the author of the bestselling book Rich Dad, Poor Dad, recommends that you always “pay yourself first.” By this, he means that you contribute to your savings before you meet all your other financial responsibilities by figuring your savings based on your gross income (before taxes and deductions).
A good rule of thumb is to contribute 25% of your gross earnings to your long-term savings goals, such as retirement plans, IRAs, brokerage accounts, and HSAs. If 25% doesn’t work for you, adjust that number however you like. Just make sure you stick to that percentage and put it aside from every check, without fail.
After you’ve “paid yourself first,” you should meet your monthly expenses and then allocate percentages of your remaining cash to other money goals. As a variable comp earner, it’s smarter to focus on percentages rather than specific dollar amounts because then you can allocate appropriately whether your commissions check is $1,000 or $10,000.
It’s a good idea to focus your money goals on these items, in order:
- Debt repayment – 30%
- Short-term goals – 20%
- “Fun” big savings goals, like international travel -10%
Again, feel free to adjust these percentages to fit your needs. This calculation leaves you with 40% of your remaining income as disposable, which gives you freedom to spend on entertainment, dining out, gifts, or your hobbies.
An important tip: Don’t fall victim to the “free money” fallacy. Every $1 you get is valued the same, whether it comes in the form of a birthday gift, gambling winnings, or the profits from a yard sale. Maintain these allocation rules no matter how you got the money, and watch your savings add up.
And another important tip: Before you allocate to these additional savings goals, make sure you build up your emergency fund to cover 3-6 months’ worth of expenses.
General Investment Tips to Make the Most of Your Variable Compensation
Of course, you’ll want to max out your IRA and/or 401(k) contributions, but there’s a way to get the most out of your short-term and “fun” savings accounts too: be careful about your banking.
We can’t give you specific investment advice but, in general, employees earning commission pay may want to:
- Place emergency savings into a high-yield savings account to take advantage of higher APYs
- Consider short-term Certificates of Deposit for short-term savings or “fun” savings cash, if the rate of return is reasonable
- Assess checking account fees and see if you can lower them
- Consider index fund investments from discount brokerages, rather than mutual funds which often feature a lot of administrative fees
One Final Tip for Success
Finally, make sure you pay attention to how you spend your money in addition to how much you’re spending. You may spend the same amount on a big international trip as you do on a new motorcycle, but the motorcycle purchase locks you into fixed payments over years, whereas the international trip is a “one and done.”
As we covered earlier, it can be difficult to reduce fixed expenses as opposed to variable expenses… so just be cognizant of the long-term effects of your spending choices.
Since 2002, companies across every sector have relied on EthoTech for the right tool for tracking, calculating, and paying variable compensation. We provide solutions, integration, and support that is focused solely on integrated variable compensation software for Microsoft Dynamics GP. It’s all we do, and we do it better than anyone. Contact EthoTech to learn more.