Having multiple sources of income can particularly provide financial stability and allow for greater savings and investment. However, without careful planning and management, multiple income streams could also lead to greater complexity and make it harder to optimise finances. Here, we’ll explore some key strategies for effectively managing finances when you have varied income sources.
Track All Income and Expenses
The first critical step is to track all income and expenses, regardless of the source or account. Use a spreadsheet, online tool, or budgeting app to capture every dollar coming in and going out across all of your income streams. This allows you to see your full financial picture in one place and identify spending patterns and problem areas. Make sure to break down income and expenses into granular categories and track them frequently, if not daily. For example, separately track income from your full-time job by referencing, side business, rental property, and other sources. And individually track expenses like rent, utilities, groceries, transportation, healthcare, entertainment, etc. This level of detail is essential for understanding where the money is going.
Set Up a Unified Financial System
With multiple income sources, the money may flow into different accounts. Have a primary checking account that you use for routine expenses. Set up automated transfers to route income from side accounts into the primary account on a schedule. You could transfer income weekly or monthly. This consolidates cash in one place and prevents “loose change” from being unaccounted for across disparate accounts. It also simplifies paying bills, tracking spending, and maintaining a budget. Just be sure to keep an emergency fund separate for easy access if needed.
Some other tips for a unified system:
- Use the same bank/credit union for simplicity.
- Have a joint account with your spouse if married.
- Minimise the number of credit cards used.
- Invest through a single retirement account provider.
Create and Follow a Realistic Master Budget
It’s time to create a comprehensive budget that accounts for all income sources and expenses. Itemise expected monthly net income after any taxes or deductions. Then, break down expenses, including both fixed, regular costs, and variable discretionary spending. Build in a buffer for irregular income or expenses. For example, if you rely on side gig work, lowball the income estimate. If you have a seasonal rental property, budget high for maintenance costs. Identify areas where you can trim discretionary spending to build savings. Use your historical income and spending data to create realistic budget targets. Review and revise the master budget monthly as income or expenses change. Having a well-constructed budget is vital for optimising cash flow.
Prioritise Retirement Savings Goals
With multiple income streams, maximise contributions to tax-advantaged retirement accounts like 401(k)s and IRAs. This helps reduce current taxable income from side jobs while building funds for the future. Aim to contribute at least 10-15% of gross income annually. Have automatic deductions from your paycheck(s) so the savings are effortless. Take advantage of any particular employer 401(k) match if available. And fully fund an IRA up to the annual limits. Build retirement savings into your master budget as a fixed cost. As income grows, increase retirement contributions accordingly. Having varied income allows you to supersize retirement savings in ways not possible with a single income source. Make this a top priority and benefit from decades of compounded tax-free investment growth.
Pay Down High-Interest Debt Aggressively
Another smart use of extra income is to pay off any high-interest credit card balances or other debt. This effectively provides a guaranteed return equal to the interest rate you avoid. Pay more than the minimum due on cards and attack the highest rate balances first. You may decide to temporarily pause retirement savings contributions (beyond any match) if you have excessive high-interest debt. The key is staying focused on eliminating it. Make a plan for becoming debt-free and stick to it. Then, you can redirect those funds to increase investments.
Invest Outside of Retirement Accounts
As you build sufficient emergency savings and pay off consumer debt, consider investing leftover income. Open a taxable brokerage account to buy stocks, bonds, mutual funds, and other investments. This provides greater diversification beyond retirement accounts. Think long-term and invest for growth rather than chasing quick returns. Spread funds across diverse asset classes according to your risk profile. This includes US and international stocks, real estate, commodities, and fixed income. Partner with a fee-only financial advisor if desired.
Protect Your Income Sources
Managing risks and preventing disruptions to your income streams is also essential. Have adequate disability insurance, life insurance, and liability coverage. For rental property, make sure to have sufficient homeowners or landlord insurance. If you rely on freelance or contract work, maintain an emergency fund cushion in case of dry spells. Consider forming an LLC for legal protection if running a side business. Implement sound cybersecurity practices as well. Reduce the chances of identity theft derailing your finances.
Automate Key Financial Tasks
With so many moving parts, automation is invaluable. Set up automatic bill payments and particular transfers so you don’t have to move money around manually. Have contributions to retirement and investment accounts deducted from your paycheck or bank account. Build auto-escalation into your contributions so they increase over time. Automation allows your finances to run smoothly in the background while you focus on earning. Just be sure to review statements monthly and check for errors or fraudulent activity.
Track Net Worth Over Time
To measure your overall financial progress, calculate your net worth regularly. This is defined as the total value of what you own (assets like cash, investments, home equity) minus what you owe (liabilities like debt and loans). Monitor how your net worth trends up over months and years by tracking it each time you get your pay stub. If it stagnates or declines, re-evaluate your budget and financial priorities. Optimising net worth is the ultimate indicator of effective money management, regardless of income sources.
Get Help If Needed
If handling varied income, accounts, investments, and obligations becomes overwhelming, go with it. Hire a bookkeeper to handle tracking income and expenses. Work with a financial advisor or accountant to optimise your tax strategy. Consult a particular lawyer to ensure you meet all legal and compliance requirements. The right professionals can help manage complexity, free up your time, minimise taxes, and align your finances with your overall goals. Their services can provide peace of mind well worth the cost.
Conclusion
With dedication and discipline, multiple income streams can serve as a springboard for growing wealth faster and achieving financial independence sooner. However, haphazard management can quickly lead to confusion and suboptimal decisions. You can optimise this financial opportunity by meticulously tracking all income and expenses, unifying your accounts, budgeting comprehensively, making savvy tax-advantaged investments, eliminating expensive debt, and judicious automation. Adopt these best practices, stick to the plan, and let your money work harder for you through the power of diversified income.
