Smoothing Out Lumpy Cash Flow

Receiving most of your compensation in a few large paychecks is exciting to finally see in your bank account. But it causes a lot of headache when juggling cash flow for the year ahead. Financial professionals (private equity professionals, investment bankers, and asset managers) struggle with this problem given the industry’s compensation models. Investment bankers, for example, can have a bonus paid on a single day that is more than double or triple their base salary. To deal with this payment concentration, laying out a list of priorities helps.

Below are the key items to consider when planning for those lumpy payments. Staying disciplined to this plan can set the stage for future financial success.

Set Up Your Cash Reserve

• Lifestyle Fund – maintain an amount of cash in your checking or savings account to fund your day to day spending. Forecast your spending to ensure there is plenty to bridge to the next lumpy payment.
• Rainy Day Fund – maintain a separate rainy-day fund that is set up for emergencies (lost job or unexpected spending). For financial professionals, dual income households should reserve 4-7 months of monthly spending while single income households should reserve 8-12 months of monthly spending.
• Tax Reserve – work with your CPA to ensure you have cash set aside for quarterly tax payments and future tax liabilities.

Save for the Future

• 401(k) & IRA – max out savings to your 401(k) ($19,000 in 2019) and consider IRA contributions or backdoor Roth conversions ($6,000 in 2019).
• After-Tax Savings – each year you should target additional after-tax savings for retirement. Utilize this lumpy cash payment to fully or partially fund this goal as you gear up for your personal exit.
• College Savings – if you plan to support your children’s education goals, saving into a 529 account can be a great vehicle for this future expense that is tax efficient.

Enjoy the Fruits of Your Labor

• Enjoy Time with Friends and Family – find time to spend with those who matter to you most. Whether that is a vacation or a fun activity, ensure you are making time for these connections.
• Passion Project – if you are passionate about a hobby or a charity, look to engage further and invest these earnings into a project that can refresh you for the year ahead.
• Treat Yourself – you work hard for your money, reward yourself with something nice. But remember to watch your spending and ensure you are accounting for all the savings and cash needs first.

The finance industry offers a lot of great opportunities. However, getting paid in large, chunky installments makes cash flow planning more difficult. Determining a plan and staying disciplined to your list of priorities eases the stress and sets your family up for future success. As you approach your next lumpy payment, challenge yourself to ask the question – do I have my plan in place?