Finance Tip Friday #43: Living on Variable Income

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Being able to pay yourself an income through your business to live off can be difficult for the nurse practitioner entrepreneur. Businesses will have either regular/predictable income or variable income. Often, it will be variable, especially during the initial 1-2 years.

Hopefully, your practices revenue continues to grow, and you can pay yourself more and more as you generate more money, but sometimes the income can vary month to month… There are slower months than other ones and patient volume can change depending on the season, therefore your revenue can vary. Thus, it is important that you develop a system to where you are paying yourself a REGULAR income that does not change based off patient volume and revenue.

I discuss how to pay yourself through your LLC, S-Corps, and the tax implications through this, this, and this article, so we will not be discussing that here. What I want to talk about though is determining what the amount you pay yourself regularly should be, considering the variability of business income. Remember, everything extra your business generates is a profit and can be paid to you as an owners draw/bonus free from employment taxes. But you still need to pay yourself something regular to live off.

First off, you need to determine how much your personal burn rate it. Hopefully you are living below your means and your personal expenses are low, but many people don’t even know what this number is. So, go through your monthly expenses for the past 6 months and determine how much you NEED to live.

Once you got that number, then add on another 10-20% for fun money. You still gotta live right? This is optional though if revenue is lower.

After that, determine how much you want to invest on a regular basis using a dollar cost averaging method and add that to it. If you are still in the beginning stages of operating your practice or if revenue is lower, than skip this and hopefully you can use your owners draws/bonuses to invest with. Remember, you should be investing a large chunk of your money regularly if you seek financial independence.

After you do all of the above, you should now have an estimation of how much you should be paying yourself. Hopefully, this number is realistic and achievable based off your practice’s revenue, regardless of the variability of your practice’s revenue.

Now like I mentioned earlier, sometimes income through a nurse practitioner practice can be variable, and maybe you can’t pay yourself a regular income to cover your expenses. Maybe you will just need to pay yourself as the money comes in. If this is the case, you MUST have a nest egg saved to help you weather the slow times. You need to have 2 funds:

An emergency fund.

A “living” expense fund.

The “living” expense fund is just that: money to live off. I personally think this should be equal to 3 months of living expenses. Slow times should NOT last 3 months in your business. Variability typically is month to month, but it should not be quarterly unless something significant is happening in our economy. If you can, save up this amount of money from your job during the business startup phase and NEVER touch it.

Another thing you can do to help with having variable income is having a part-time job. If you follow The Elite Nurse Practitioner Model, then you should be maintaining a part-time job (1-2 days a week) during the initial phases of your practice. The reason being is to offset the RISK of the variable income. Hell, I maintained a part-time job for many years, and I learned how to live off that part-time income. Now that I am 100% self-employed, I just live off my business income exclusively anymore.

So, estimate how much you need to for your personal expenses. Look at your businesses revenue and determine if it is possible to pay yourself that amount. If it is not possible, then pay yourself the maximum amount you can WHILE maintaining 3 months of business expenses in the bank. As business income increases, then increase your income WHILE maintaining business financial stability. What you want is the variable income to affect the owners draw/bonus, NOT the regular income you are paying yourself.

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