Coffee heat rising

Managing a Variable Income: A bouquet of bank accounts

Readers have suggested that one reason underlying my occasional fits of panic over money, which usually occur when something interrupts cash flow that I had planned on and depend on to pay bills, is my habit of allocating funds to various categories. Possibly, they imply, the sea would be calmer if all income poured into a single account and I just didn’t worry about whether enough was sitting there to cover taxes, insurance bills, and the inevitable little surprises. After all, I do have a decent emergency fund—$14,500, more than I gross all year from teaching. In theory, that should cushion the various little blows that strike from time to time, and it should cover the hefty annual bills one has to pay.

It is true that I have a bad habit of overmanaging my finances. The result is that I indeed do complicate things, typically by setting up piggy-banks to hold funds designated for this or that purpose. These organizational devices grow over time into weedy Gothic structures with lots of gingerbread on the facade and secret stairways inside the walls.

One facet of this underlying problem is that I’m now living on a highly variable income. From September through May, a steady flow comes in from the community college. But I never know how much that flow will be: there’s no way of knowing how many classes I’ll be teaching until they’re assigned; in September, January, and May, classes meet only a few days, and so pay from that is predictable only in its sketchiness; and I can occasionally earn little stipends by attending training workshops or preparing an online course. Social Security, we’ve seen, has its treacherous shoals. Blog income can be anything from $100 to $300 in a month. And freelance editing is very much a catch-as-catch-can endeavor.

This, for a person who harbors a pathological desire to know that each month enough cash will reside in the bank to cover the utility bills, is nervous-making.

During the time leading up to the layoff, I mapped out a strategy for “smoothing out” income so there would always be enough (I hoped) to put food on the table and run the house. Fundamentally, the idea is to build a “pool” with a reserve deep enough to protect one from unexpected expenses or periods with no income. Out of that pool, money is allocated to pay costs that recur over longer cycles than one month. In my case, these are all annual: property tax, homeowner’s insurance, car insurance, Medigap insurance. I can’t easily pay such large bills out of pocket; the only way to ensure enough cash to cover them is to self-escrow a prorated monthly amount. The income “pool” also disburses a small monthly transfer to a savings account, which accrues enough over time to pay for things like clothing and the occasional surprise car repair or plumbing bill.

As I was figuring this out, I realized the six or eight credit union and bank accounts (not to mention the many investment accounts at Fidelity, TIAA-CREF, and Vanguard) had become unmanageably baroque. I was spending way too much time reconciling accounts and trying to figure out arithmetic and data entry errors. I decided to consolidate as many accounts as I could…that’s how, last December, I unearthed some $28,000 that had been accumulating over the years, like so much dust in the House of Usher.

So I closed all but three bank and credit union accounts, invested $14,000 in mutual funds, and kept $14,500 in the bank to serve as an emergency fund. Actually, since I did not believe I could possibly live on a gross of $29,900 (Social Security plus the $14,160 I would be limited to earning in 2010, by SS rules), I expected I would need that 14.5 grand to live on this year, and so that money became the deep underlayment of the “pool” account. It would sit there as money from various income streams piddle in to the “pool.”

The three surviving credit union accounts, then, comprised a checking account to hold the $14,500 emergency fund and month-to-month spending money, a savings account to hold a monthly set-aside for short-term emergencies and necessities such as clothing, and a money market account to hold the monthly self-escrow to cover annual property tax bills and insurance premiums. I know myself well enough to know that if I don’t put those funds where I can’t reach them casually, they will get spent long before the clothing costs or the annual bills roll in.

My financial advisers and I knew that three sections a semester, the teaching load I could reasonably expect, would put me$340 over the Medicare earned income limit, which would mean confiscation of an entire month’s Social Security check. We did not know how much Funny about Money would earn, and the amount of editorial earnings is utterly unpredictable. But we did know that every dollar earned blogging and freelancing would trigger a 50-cent penalty from Social Security; that amount, no matter how small, would be extracted in a peculiarly abusive way that is  not described in Social Security’s complicated guides. To avoid having freelance and blog income bring on even more punishment for exceeding the earnings limitation, my lawyer suggested an S-corporation, which would hold that money separate from my personal income. It would have to pay me a small salary—last year that came to $500, gross—but it could pay business-related expenses out of pretax dollars, and anything above the salary I drew out would be counted as dividends, not as “earned income.”

Because corporate income must be kept separate from personal income, of course I had to establish a business account for the S-corporation. So much for my bank account simplification program!

Still, even with that corporate account in the mix, I think my system for getting by on an unpredictable and variable income works pretty well and is relatively simple. The four credit union accounts are represented here by blue boxes:

All personal income goes into a checking account, which serves as the “pool” of funds to cover all expenses, self-escrows, and savings. The personal checking account also holds the large emergency fund, which, because it represents enough for me to live on (when combined with Social Security) for a year, I regard as money to cover living expenses during a serious illness or injury that would leave me unable to work at all.

At my age, it’s not a question of if such an event will happen; it’s a question of when. For that reason, I’m extremely reluctant to dip into the “major catastrophe” emergency fund for ordinary living expenses.

That is why I had a hissy fit over the misinformation recently dispensed by Social Security’s telephone CSRs and the subsequent confiscation of next month’s Social Security check. This fiasco will require me to use up to $1,275 of my catastrophic emergency fund. After last spring and summer’s clothing purchases and the Murphy’s Law spate that occurred when too little income was flowing into that account to cover the base expenses of utilities, insurance bills, and food, not enough remains in my personal diddle-it-away savings account to cover $1,275. Drawing dividends from the S-corporation, while it’s doable, would trigger some taxes I don’t want to pay and leave too little in that account to cover the business expenses I project for the next four to six months.

As you can see, living on freelance or nine-month teaching income is a very iffy arrangement.

If you have a large enough contingency fund…
If you earn more than enough to cover monthly bills, more times than not…
If no major catastrophes occur…
If few expensive minor headaches occur…
If no one shafts you…
If you can keep on getting work…
If you have the self-discipline to husband your money so it will last through lean times…
If you don’t have a nervous breakdown when too little comes in to cover your basic bills…

There may be other ways to manage these unknowns. The only one that occurs to me is to build a nice, deep “pool” that will always hold more than you really need to live on, and then to budget out of that enough to cover expenses. Heaven help you if you don’t have an emergency fund!

Anybody else got a better approach?

w00t! Money about to happen?

So I’m sitting here sweltering through a crush of semester-end stoont papers when what should pop up in the e-mail but a last-minute call for someone to teach a humanities course in the first summer session at a different campus in the community college district. Money happens!

Now at last, folks, we’re talkin’ fair wage: a summer session runs for five weeks; $2,400 for a month and a week of light work comes under the heading of decent pay. Although my Ph.D. is in English, not humanities per se,  my undergraduate degree is in French language and literature. “Humanities” is a vague term that used to mean “classics” but now means almost nothing—as a practical matter, colleges will hire people with almost any degree in the liberal arts to teach these courses. And the beauty of these courses is that assessment can be largely through online tests. Naturally, one would like to assign a term paper or a couple of shorter papers, but they don’t have to be parsed for mechanics and style. People grade these things on the basis of whether the student seems to have responded to the assignment and done the reading, rather than for the student’s writing skill.

Piece. of. cake.

It would push me over the Social Security earnings limit by about $350. More than that, really, because I’ll have to take a “salary” from the S-corporation in December. However, it could be worth it: barring another market crash, I’ll have enough cash to weather a month without the Social Security payment (loss of which is one of the consequences of exceeding the limit).

More to the point, we don’t know that either of the two courses I’m lined up to teach in the fall will make. They’re set up as two eight-week sessions, back-to-back, English 101 first followed by an online feature-writing course. The idea that a freshman comp student will sign up to sit through two three-hour sessions a week verges on the preposterous. And the feature-writing course will follow a nearly identical in-class section a colleague will teach in the first half of the semester.

BTW, if anyone would like to sign up for that feature-writing class (it’s billed as “magazine writing”), it’s 100 percent online, and there’s no out-of-state tuition for online courses. If you’re a blogger, I probably would accept posts that fit the parameters of the assignments—these will include things like a profile, a straight report, an opinion piece, a brite, a how-to, a round-up, or whatever else I can dream up. The course is English 235, Magazine Article Writing; it runs from 10/18 to 12/10/2010. You can register online; from what I can tell, you need to start by getting admitted through this site. There’s a phone number: 602-787-7020.

Anyway, back on topic: I’m less than thrilled at the prospect of working away half the first real summer break I’ve had in 20 years. On the other hand, trying to get through the summer on less than half the income I’ve had this semester is a little scary, plus next fall’s semester will pay $2,400 less than I’ve been earning. The hot season pushes utility and water bills through the roof, and that coincides perfectly with the switch to Medicare, which also will elevate my health coverage bills significantly.

I’m thinking it may be worth having a month’s worth of Social Security taxed at 50%. From what I’m told, the minute the IRS finds out you’re going to exceed the annual earnings limit, they withhold an entire month’s SS benefit. From that they subtract the amount they figure you owe in the tax rip-off—but you don’t get the remainder of the money back until the following January! So the punishment for exceeding the earnings limit is effectively the loss of a full month’s SS income. That’s pretty hefty, when it represents half your net income.

But it may be worth it, to be sure there’s enough to live on over the summer. Maybe.

What’s an intellectual worker’s real overhead?

Over at The Copyeditor’s Desk, TM opines that a freelance editor working from home does business with a very low overhead: a computer, an Internet connection, appropriate software, some inexpensive paper, a few pens or pencils, maybe babysitting or day-care costs.

On a superficial level, I’d agree with that. But I’d like to argue that there’s a lot more cost behind editing, writing, graphic design, programming, and similar pursuits than just hardware, software, and some office supplies. The truth is, none of us can do our jobs without one very expensive piece of overhead: education. By and large, the more education the intellectual worker has, the more his or her skills are worth . . . but the higher the person’s overhead.

Consider what a good education costs. An undergraduate degree at an in-state public school can easily run you $15,000 to $20,000 a year. We paid $40,000 a year for M’hijito’s four-year degree at a private liberal arts college.

Two years of graduate school will take you to the M.A. (assuming you’re trotting right along): add another $30,000 to $80,000. A professional degree will set you back even more: the Great Desert University, which bills its law school as “among the lowest of all American Bar Association accredited law schools,” presents in-state students with a tab of $35,041 and bills out-of-state students $47,606. At GDU, a Ph.D. in a less marketable subject, such as English, runs from $7,052 a year for in-state students to $19,606 a year for out-of-state students (not counting books, housing, food, transportation, and personal costs); attaining a doctorate can take six to eight years.

So… A bright mind, a bachelor’s degree, and a few years of on-the-job experience probably will put you in a position to freelance as an editor, a writer, a graphic artist, or a computer programmer. Let’s figure the start-up costs:

Computer: $1,000
Printer/FAX/Scanner: $300
Internet connection: $360/year
Software:$300 (e.g., indexing program, etc.; assumes MS Office comes with computer)
Student loan: $8,724/year (approx: $60,000 repaid over 10 years at 8% interest)
Office supplies: $200
Desk: $300 (Ikea or other knock-down furniture)
Chair: $100 (Ikea or other cheap furniture)
Total: $11,984

Assuming you could bill 30 hours a week (a generous estimate, indeed!) and you needed a pre-tax income of $40,000 to live on, you would have to gross $51,984 a year to get by. Giving yourself two weeks of vacation time, you would have 1,560 hours in which to earn that amount, meaning you would have to gross $33.32 an hour: consistently and steadily.

This doesn’t count items that would be in your house anyway, such as a telephone connection, air conditioning and heating, water, and access to a bathroom and kitchen. And the biggie: it doesn’t include health insurance!

If you had a low-end master’s degree that you managed to complete in only two years, you’d add $30,000 to the cost of your training (assuming you count books, living expenses, & the like). What the heck: let’s pay that back in 20 years instead of a mere 10; at 8% that would run you $426 a month, or $5,112 a year. This actually brings your annual overhead down to a mere $7,672; to get that 40 grand of pre-tax income, you’d need to earn $47,672, or $30.59 an hour over fifty thirty-hour weeks.

Hm. What if you had a Ph.D.? Let’s say eight years of graduate school at $14,000 a year, since research assistantships and fellowships usually cover most of your living expenses. Again, you pay it back at 8% over 20 years: $936.81 a month, or $11,244 a year! This puts your annual overhead at $13,804. Now you need to pull in $53,804 to end up with a pre-tax, pre-health insurance take of 40 grand: $34.49 an hour.

In any of these scenarios, you’re having to earn $30 to $35 an hour and bill 30 hours a week consistently for 50 weeks a year. That’s to bring in an amount that’s just enough to call a living wage. Sort of.